KYC chains in the financial sector are essential, requiring strict compliance and costly manual processes. The Know-Your-Customer process is the backbone of a financial institution’s anti-money laundering efforts. Spending on KYC processes worldwide is estimated to have increased to $1.5 billion. While this process is costly, it is estimated that much of the effort is spent on information gathering. Minimal effort is required to evaluate and closely monitor the data.
What is KYC? Is it essential for cryptocurrency trading?
The term “Know Your Customer” refers to checking and verifying a customer’s authenticity for an institution. This requires the client to submit all her KYC documents before investing in various instruments. Financial institutions are usually required by their RBI to go through their KYC process for all customers before giving them the right to carry out financial transactions. Whether the customer uses her KYC online verification or opts for offline KYC, this is a simple one-time process for her.
Regarding KYC for crypto trading, investors don’t need to complete the KYC process for crypto trading, but crypto exchanges and platforms are increasingly moving towards requiring that KYC be completed. Customers of many decentralized services are generally anonymous, and their personal information is kept private from a central authority that cannot be identified.
Unacceptable by regulatory authorities. Even the most reluctant cryptocurrency companies are forced to adopt increasingly stringent KYC measures as they face increasing pressure and punishment from regulators. For example, cryptocurrency exchange Binance announced last August that new customers must present their government-issued ID and pass facial recognition to make deposits and transactions.
Centralized KYC system
In the current centralized system, each financial service provider creates specifications for its KYC documents. As a result, the user must comply with the KYC requirements of all institutions and services her providers use. All financial institutions and service providers must also provide a separate notice of subsequent updates to user data: blockchain and the thinking behind his KYC.
All businesses must verify identities somehow, which is especially important for financial institutions. This Know Your Customer, or KYC protocol, now helps companies to know who they are doing business with. Typically this involves lengthy extended practices where certain documents are viewed, and some background check or screening is done.
KYC blockchain implementation
In his traditional KYC system, each bank does an identity check. Each user is independently verified by a single organization or government agency. Therefore, it takes time to verify each ID from scratch. Blockchain architecture and DLT allow the collection of information from various service providers into a cryptographically secure and immutable database. The authenticity of knowledge can be verified without the involvement of a third party. You can build a system verifying your identity with just one KYC procedure.
Here are the steps:
- For the KYC procedure, the user submits documents to one of the banks he wants to take out a loan or use another service.
- Individual participants’ responsibility is to collect and store personal data (banks, authorities, companies, or users themselves).
- The bank will check and confirm the KYC passage if everything is fine.
- Banks are responsible for entering data about their users into the blockchain platform, which can be accessed by other banks, organizations, and national structures. All parties can manage and regulate her KYC process. The system monitors user data for changes and updates; when someone breaks a rule, all parties are aware of it.
- The user can verify their identity if they want to use the services of another bank.
- Access to user data is only based on the person’s consent. The user must be logged in for cryptocurrency transactions. Use your private key to initiate the information exchange process.
Advantages of blockchain in KYC/AML processes
The decentralized technology use case in KYC technology is not just a blockchain-in-fintech product. Many sectors are working with blockchain development companies to research applications.
Distributed data collection
Implementing blockchain for KYC puts data on a decentralized network that parties can access after permission is granted. Additionally, the system provides efficient data security and eliminates instances of unauthorized access, as data cannot be accessed without user consent.
Improve operational efficiency
Features such as un-hackable digital processes and sharing of user information over approved networks can significantly reduce the effort and time required during the early stages of KYC. This reduces customer onboarding time and reduces regulatory and compliance costs.
Verification of the accuracy of information
A KYC blockchain system allows transparency and immutability so that a financial institution can verify the authenticity of data held on its DLT platform. A decentralized KYC process is a streamlined way to securely and quickly access up-to-date user data. This reduces the effort the agency spends in gathering information.
User data is updated in real-time.
Every time his KYC transaction is performed at a financial institution, that information is shared on a distributed ledger. These KYC systems use blockchain technology to give other participating institutions real-time access to updated information and ensure they are notified whenever new or changed documents are added.
Why Decentralized KYC Will Benefit His DeFi Industry
Decentralized KYC opens the door to institutional liquidity, contributes to the growth of the Web3 ecosystem, and fosters innovation. KYC implementation also strengthens the reputation and stability of decentralized exchanges as it prevents fraudulent or malicious actors from acting in a harmful way and protects DEX users. Finally, we explored adding decentralized KYC to Polkadex to enable support for fiat currencies, further lowering the barrier to entry for users of traditional finance looking to move to DeFi.
Social KYC: The Future of Decentralized KYC?
Presented by the KILT protocol, SocialKYC is another exciting innovation discussed during the talk, enhancing the decentralized trading experience on Polkadex. You will be able to manage, store and view your credentials, and you will be able to choose which elements of your personal information are used for verification.
For Polkadex, SocialKYC is an opt-in service that allows users to publicly tag themselves with various credentials that make up their identity while protecting their right to privacy and their data. You retain the right to manage in your own hands. For example, a user can add her Twitter or Reddit username to her Polkadex wallet address.
SocialKYC also allows users to get their money back with the help of their friends if they lose their keys. It also enriches the Polkadex governance ecosystem by helping to map council members and improve transparency. SocialKYC makes Polkadex more convenient for users and improves customer support.
KYC can still be a thorny issue in cryptocurrencies, but he believes decentralized KYC is essential to the future of Web3. Polkadex’s decentralized KYC solution allows you to create your own efficient order book-based decentralized exchange while giving users control over their data, identity, and destiny.
Contact us if you want to build blockchain services.