Are Banks Ready for a KYC Revolution?

by K2 Intelligence Investigations · Compliance Solutions · Cyber Defense

K2 Intelligence - Investigations · Compliance Solutions · Cyber Defense

Blockchain is a disruptive innovation as an ID management tool.

Many of the world’s largest financial institutions have invested in distributed ledger technology—known popularly as blockchain technology—to improve their business operations. An area where this disruptive innovation holds promise is identity management.

To date, a large amount of the investment has been in the areas of clearing and settlements, trade finance, and payment technologies. Based on this, it is clear that blockchain is here to stay, and there is a compelling opportunity for the financial services industry to adopt it on the consumer side for know-your-customer (KYC) programs. The question now: Is the anti-money laundering (AML) community ready to embrace a discussion about the disruptive power of digital identity?

The benefits of blockchain technology are too compelling to ignore, as they offer financial institutions the opportunity to achieve that much-desired and much-needed balance between protection of consumer data and adherence to laws and regulations. According to one analysis, financial institutions globally spend an estimated $18 billion annually on AML costs and fines. With blockchain technology, banks no longer have to imagine achieving compliance and dramatic cost savings at the same time; the technology is already here.

On a broad scale, the advantages of blockchain technology include:

  • Traceability: Participants of the blockchain, including merited third parties such as regulators, can trace information flows back through the entire chain. Because blockchain technology is inherently immutable, it means that no information (including ownership, transaction history, or data lineage) or entries can ever be deleted or altered.
  • Transparency: Blockchain, by design, provides participants with access to the entire ledger or transaction trails at any time. Therefore, those with permissions can have insight into processes and documents in real time or near real time. One of the most familiar use cases is trade finance and the ability to access bills of lading and letters of credit at any point throughout the transaction.
  • Trust: Participants are able to trust the authenticity of the data on the ledger without recourse to a central body. Transactions are digitally signed; the maintenance and validation of the distributed ledger are performed by a network of communicating nodes running dedicated software that replicates the ledger among the participants in a peer-to-peer network, guaranteeing the ledger’s integrity.

These advantages inherent to blockchain technology enable the AML community to walk the tightrope between protecting customers’ privacy and complying with strict AML and KYC laws and regulations. Blockchain technology also provides regulators with real-time access to activity and an automatic and immutable audit trail.

Taken as a whole, these benefits would contribute to rebuilding a culture of trust within financial institutions and between institutions and regulators. The AML community now must consider the potential for using blockchain technology in identity management. Although doing so may require a change in mindset and the restructuring of the AML culture, the rewards over the long term are too great to ignore.

Disruptive innovation is disruptive for a reason; it calls for new approaches to a conventional process. Banks have invested heavily for a long time in their AML compliance operations. Altering those investments to take advantage of blockchain technology is a strategic decision that banks should not undertake lightly.


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