Know your customer (KYC) and anti-money laundering (AML) rules, while very useful for preventing and tracking crime, can also be a major burden for financial institutions such as banks. The reason is because complying with KYC/AML regulations is time consuming and expensive.
In fact, financial institutions spend an average of $60 million per year on KYC compliance. This is because there is an extensive amount of administrative work that must be done to comply with all of these regulations, and it takes significant bank resources to comply.
Essentially, KYC and AML compliance is something that inconveniences almost every bank that has to deal with it. Luckily, however, a potential solution has arisen which could solve a lot of the problems associated with KYC and AML. This solution is Blockchain technology.
What is Blockchain technology?
When most people hear the phrase “Blockchain technology,” they think of Bitcoin, which is the largest and most famous cryptocurrency in existence. Blockchain technology is also used for many other cryptocurrencies such as Ethereum, Litecoin, and others. A Blockchain is essentially just a universal, public ledger that records transactions. The goal of a Blockchain is to have transparency, and to prevent fraud from occurring. Essentially, it is a highly innovative, and effective way to record data.
Read More about Blockchain: BLOCKCHAIN, CRYPTOCURRENCY AND BITCOIN – Different Faces of the Same Coin or NOT!
How can Blockchain be used for KYC and AML?
Despite the fact that Blockchain technology is very effective for helping cryptocurrencies to be run successfully, that is not the only thing that it can be used for. Blockchain technology is now being used for multiple use cases spanning various domains and industries. It helps to transfer anything of value online in secured and authenticated manner. One such use case is KYC and AML. This is because Blockchain could hypothetically act as an incredibly secure and accurate way to store personal information which is used for KYC and AML compliance.
So, if Blockchain was to be used for KYC and AML compliance, a customer could create one “block” by entering all of his or her personal information which is required for KYC and AML compliance. This information would then be encrypted and stored on the Blockchain. The individual would be given a password, or private key which has to be entered in order to see the information.
Then, whenever that person wants to sign up at a new financial institution, he or she need only give the financial institution the password for his or her Blockchain info, and then the financial institution would be able to access it and automatically upload it.
What are the benefits of doing this?
There are many benefits to using Blockchain technology for KYC and AML. The first is that a common KYC and AML Blockchain registry could be created which could be used by many different banks and financial institutions. This could speed up the onboarding process and dramatically reduce the costs of KYC compliance. Every time that a bank is signing up a new customer, a bank employee could be given a password to access the customer’s KYC information instead of having to walk the customer through all of this information every single time.
Another key benefit is that a KYC and AML registry could be created for intra-bank use. This means that when customers are using different services provided by the bank, that the bank could rely on the Blockchain registry to complete the KYC and AML compliance instead of dealing with all of the compliances over and over again every time the customer wants to use a new service or buy a new banking product. This could radically speed up and reduce costs for KYC and AML compliance, which would be highly beneficial for banks.
Blockchain technology has already proven itself to be very effective for not just cryptocurrencies but other use cases like Supply Chain Finance, Trade Finance, Track and Trace etc. As the technology matures, we are bound to see many production level deployments in 2018. The banking/finance industry has been the major beneficiary Blockchain. The $60 million that banking industries spend on KYC costs annually could be dramatically reduced, helping banks to improve their bottom line, and give their customers smoother onboarding in the process.
If banks and other financial institutions do start to adopt Blockchain technology for KYC and AML purposes, then it could trigger a swift transition and it could soon become the industry standard. This will likely happen if banks see other banks benefiting from using the technology. After all, banks compete with one another, and no bank wants to miss out on a competitive advantage that helps it to provide a better overall service.