When it comes to dealing with financial crime and the challenges posed by bad actors, having efficient and scalable technology is a huge must in the industry today.
One particular technology that could be transforming the KYC process specifically is blockchain. According to Debora Basu, customer success manager at Napier AI, in the realm of financial crime compliance, wealth & asset management firms are often using legacy or manual processes to deal with financial crime in a modern financial ecosystem.
However, as new challenges arise, there is an increased need to move from short-term incident-driven approaches to innovative solutions – and to keep up with the criminals.
She added, “Currently asset distributors are facing issues with data siloes across the fund distribution chain, and are constantly working to improve data hygiene.”
Blockchain, Basu stressed, has the potential to supercharge compliance functions for the better. Firstly, this can be achieved by enhancing data accuracy. She exclaimed, “Traditional methods often struggle to trace intricate transaction networks. Blockchain data analysis, powered by sophisticated algorithms, allows for the visualisation and analysis of fund flows across the blockchain.
“This capability is instrumental in identifying potential money laundering schemes or other illicit activities that would be nearly impossible to trace using conventional means,” she said
Furthermore, Basu stated that wealth and asset managers are always looking to improve data to eliminate discrepancies and reduce the risk of financial crime. Blockchain technology, she remarked, automates and centralises the onboarding, screening and monitoring process, making it easier to make checks on investors. Read More
There is also the ability for blockchain to thoroughly streamline KYC processes. “The decentralised and immutable nature of blockchain technology provides a transparent and auditable ledger of all transactions, making it a valuable resource for data analysis,” she remarked. “By linking blockchain addresses to real-world identities, KYC procedures can be significantly strengthened.”
Basu added that this shift turns the tide in favour of compliance, enabling wealth and asset management firms to navigate the intricacies of digital asset transactions more effectively and can help them to meet customer due diligence requirements from the regulators, without compromising on customer experience.
The third way blockchain can help supercharge compliance functions in the opening of Basu is that it can help with flagging exposure to sanctioned entities.
She said, “As sanctioned entities and darknet marketplaces increasingly utilise digital assets, the risk to financial institutions grows. Traditional investigations prove inefficient, but blockchain data analysis enables the identification and tracking of suspicious transactions, patterns, and wallet addresses associated with these activities. This ensures direct or indirect exposures to such entities can be promptly identified and addressed.”
Basu concluded, “As financial crime compliance faces challenges, blockchain emerges as a potential solution. Looking ahead, the growing interest in Central Bank Digital Currencies (CBDCs) worldwide adds another layer to the financial landscape.
‘Blockchain’s potential to address financial crime compliance extends to the exploration and implementation of central bank digital currencies, further highlighting its adaptability to evolving financial ecosystems and futureproofing compliance functions.’
Building trust
Consumers are increasingly growing comfortable with digital identity verification as well as the convenience of storing credentials in a digital wallet, claims Harsh Pandya, VP of product management at Saifr.
The challenge now? In this area, Pandya believes it is vital to build trust in digital blockchain-based standards and solutions, rather than convincing people of their efficiency. “The World Wide Web Consortium’s (W3C) verifiable credentials model exemplifies this shift. It enables trusted entities to issue blockchain-stored credentials, significantly reducing the risks of tampering and fraud, and setting the stage for more secure and streamlined identity verification processes across financial services,” he said.
Pandya continued, “Established identity management providers are ideally positioned to advance the adoption of blockchain technology for KYC. With the right partnerships to receive verifiable credentials on their client’s customers from document verification providers and screening technologies, like SaifrScreen, for sanctions, watchlists, and adverse media, they can offer reusable and continually verifiable identities and associated risk information across multiple financial institutions, moving beyond KYC verification once at onboarding and toward the safer perpetual KYC (pKYC) model.”
In his mind, this approach not only leads to the streamlining of the KYC process, but can also potentially lower the costs associated with KYC and broaden the scope to include continuous and dynamic risk assessment.
“As banks adopt these advanced methods, they can reallocate resources from initial customer verification to deeper and more strategic risk management. After all, while KYC verification may be one of the most burdensome steps for risk management and compliance today, it is only the first step,” he said.
Need for security
Ray Dhillon, junior product manager at DLT Apps, remarked that the emphasis for KYC in financial security is growing, but traditional KYC processes are slow and prone to errors.
He explained, “They simply can’t keep pace with the needs of the modern financial sector’s needs. This necessitates the use of advanced technologies like blockchain working with AI and ML to streamline KYC processes. Blockchain technology is emerging to help assist in this process to make it seamless and efficient.”
In Dhillon’s view, benefits of blockchain in KYC include the technology eliminating the need for repeated KYC checks, significantly reducing processing times and burdens in the administrative process.
In addition, the data stored on a blockchain is tamper-proof and distributed across a network of computers. This, Dhillon claims, significantly reduces the risk of data breaches and unauthorized access, improving overall data security. Additionally, he said all KYC data resides on a single ledger. This provides all authorised parties with a clear record.
The challenges of blockchain adoption for KYC, meanwhile, include the lack of clear regulations around KYC on blockchain, creating a level of uncertainty for institutions, which may delay the widespread adoption. Also, institutions need to invest in infrastructure and expertise to seamlessly connect their existing systems with blockchain technology.
“Utilising the blockchain can offer a smoother experience for the future of KYC. By establishing clear regulations, and developing cost-effective integration solutions, financial institutions can unlock the full potential of blockchain to create a more efficient, and secure KYC process,” said Dhillon.
Muinmos CTO Emil Kongelys added, “A DLT/Blockchain can offer a solution to the cumbersome and fragmented processes traditionally associated with KYC and anti-money laundering (AML) compliance. Its potential for centralizing identity verification and transaction monitoring is significant, though not without hurdles.
“The transparent nature of blockchain can greatly reduce fraud and increase efficiency in KYC processes. As any transaction/change to the ledger must be agreed by all, it is very hard to manipulate.”
Kongelys also highlighted that balancing the innate transparency of blockchain with the need for privacy is paramount, and that a blockchain is not limited to a jurisdiction, and the fluid regulatory landscape for blockchain technology poses a significant challenge.
“The biggest challenge will relate to trust. The blockchain that carries the KYC data must be 100% trusted by all participants. Once this trust is established, then KYC will become a single verification against the blockchain without any sensitive data needed, ensuring PII data is fully owned and controlled by the individual,” Kongelys concluded.
