Learn how blockchain-based systems are helping to facilitate better and seamless KYC/AML implementation processes in the financial sector
Fintech organizations have often erred on the side of caution when completing Know Your Customer (KYC) due diligence, due to anti-money laundering (AML) legislation and other onerous compliance standards. And more often than not, the outcome is inefficient operations that slow down business and provide a terrible customer experience. In a pre-blockchain world, this outcome is not surprising.
Given the increasing regulatory requirements, it has become a requirement for fintech and other financial institutions to adopt effective and efficient KYC procedures. Typically, government-issued credentials such as driver's licenses, social security cards, or passports can be used to confirm identity. However, confirming the authenticity of these forms of identity is a major challenge.
Although the financial services industry has been looking for a solution to the "identity" problem for a long time now, it is only now that blockchain has proven to be a feasible remedy. Furthermore, flaws in the security of such systems have resulted in numerous cases of financial fraud, money laundering, and other crimes. A blockchain-enabled KYC utility model has considerable appeal in this regard, with numerous banks and fintech firms jumping to explore the opportunity.
Thanks to the introduction of blockchain for KYC processes, data will be available on a decentralized network and may be accessed by other parties immediately once permission has been granted. Blockchain databases also allow for data consolidation from various authoritative service providers into a single immutable, cryptographically secure, and certified database, making the information contained inside them significantly more reliable.
Personal ID details may also be stored in such databases. This not only improves data security by guaranteeing that data access is granted only after receiving confirmation or authorization from the appropriate authority, but it also removes the risk of unauthorized access.
And financial institutions aren't the only ones who can benefit from blockchain technology's promise. Government entities will also gain from the implementation of the blockchain. For example, risk officers will have greater access to data, making the connection between the financial industry and regulators more open. In the long run, this will result in a substantial reduction in financial crimes.
Certainly, KYC verification using blockchain has the potential to be faster, simpler, safer, and more efficient than traditional verification methods, and numerous firms are already implementing blockchain-based KYC systems.
Let's take a deeper look at how blockchains may assist with KYC/AML implementation.
It’s no secret that companies collect customer data on a frequent basis. Given the growing volume of data collected by companies, blockchain systems have made it possible to leverage smart contracts to execute control and operational processes. KYC workflow routing may be programmed into smart contracts and standardized throughout the industry, making the process more efficient. This improves the efficiency of the blockchain-based KYC system by removing the need for manual monitoring.
Typically, when companies collect customer data, they store it in centralized systems. As a result, access to this data necessitates KYC providers to share their customer information with the organizations that demand it. With the help of a blockchain-based KYC system, though, third parties can directly access data when permission is granted since data will be stored on a decentralized network. This improves data security and eliminates unwanted access, providing users more control over their information.
Truly, blockchain is one of the best solutions against fraudulent activities. One of the most promising aspects of blockchain is that data on the blockchain ledger cannot be changed once it has been recorded since the data is encrypted, and making changes to it would require the approval of more than half of the network.
As a result of this, financial institutions will be able to verify the identity of customers easily. All parties will also be able to see any changes or updates to a customer’s data. Direct access to a shared ledger would therefore allow institutions to avoid the time-consuming process of identifying and reporting scams. And no doubt, this is essential for data protection compliance and fraud prevention.
Additionally, blockchain-based KYC solutions also enable active monitoring of all operations, which, when paired with smart contracts, may effectively detect fraudulent behavior based on pre-defined criteria. By eliminating the need for supplementary validation procedures or cross-checking, the immutability aspect of blockchain thereby helps to improve trust and transparency.
Without a doubt, blockchain technology improves the compliance process by increasing transparency with authorities. The shared and immutable ledger provides for unaltered transaction history, and it may operate as a centralized point for data storage, processing transactions, and sharing activities with risk officers. Given how inefficient and lengthy traditional KYC processes are, blockchain has undoubtedly emerged as a feasible and beneficial alternative.
The positives of implementing blockchain technology for KYC/AML procedures are apparent, and it has become essential for businesses to consider using the technology for effective outsourcing and decentralization of personal data while still maintaining compliance.
BlockX is a worldwide settlement network for digital assets, payments, and CBDC that leverages its blockchain to help organizations manage identification and regulatory challenges. Some of the most distinguishing features of BlockX include low latency, native identity and compliance, smart contract compatibility, etc. BlockX has started its funding round; you can get involved today by clicking this link.
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