KYC in Blockchain

To remain competitive in the current digitalized market majority of the companies find themselves in need to catch up with the rapidly changing environment and put their efforts to digitally transform their businesses by developing new ways for the clients to access their products on emerging technologies.

In order to help companies, identify important and significant legal developments governing the use and acceptance of blockchain technology, further work on the regulatory framework and blockchain technology, can be seen in the regulatory framework. Also legislation proposals and recommendations on the future plans captures the place all over the word, starting from the European Central Bank, FATF, other competitive  authorities and Regulators.

Whereas in Europe, The European Commission strongly endorses blockchain on the policy, legal and regulatory, and funding borders. The EU recognizes the potential of blockchain and encourages the use of blockchain technology in promoting sustainability, develop internal market, on which all parties could benefit from, addressing climate change, and supporting the European Green New Deal.  This ‘gold standard’ for blockchain includes:

• Environmental sustainability;

• Data protection;

• Digital Identity;

• Cybersecurity;

• Interoperability.

Henceforth the use for blockchain technology is on demand, meaning that the financial institutions are willing to invest in equipment that allows real-time reporting to adhere to rapidly changing regulatory rules, to remain compliant in the market, and to tracking every client activity if possible.

So, what is a blockchain and how it operates?

To put it simple – Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Hence, once the client is established on the technology net, the cryptographic key is created, it is challenging for the fraudster to access this information, as with the cryptographic verification, only when contract terms and encryption requirements are met, the access can be granted to the network. With this, the secure environment is treated with public and private sectors, which information can be easily shared with relevant authorities, and all information is not stored somewhere in their internal portals, which could not be accessed or can be easily manipulated.

The emergence of blockchain in the retail industry has brought considerable advantages. Firstly, blockchain technology is applied for stock inventory management. By using blockchain technology, companies can store all relevant information throughout the entire supply chain and trace and authenticate the entire manufacturing process of a product. Hence, all the information and identification could be stored on one blockchain for the institution to tap into during CDD process. This enhances security and transparency and reduces the environmental impact of the production process.

Thus, Blockchain technology allows people and organizations who may not know or trust each other to collectively agree on and permanently record information without a third-party authority. By creating trust in data in ways that were not possible before, blockchain has the potential to transform on how we share information and how financial institutions carry out transactions online.  Thus, technical advancements have enabled to develop a rigid Anti Money Laundering (hereinafter – AML) and Know Your Customer (KYC) process that reduces the complexity of transactions, and what can be seen if you employ the blockchain technology:

• AML system entered blockchain remains accessible to all the parties who are participants of the technology, also the data entered cannot be modified, distorted, or erased. Therefore, the information can not be hacked or easily used. Hence, the network is secured and can be monitored thoroughly by regulators like banks to ensure security and reliability.

• Transparency and accessibility of information. All the data entered can be easily read and shared and traced, hence if the large amounts of funds have been transferred the data can be easily registered and accessed to risk compliance and regulators. Blockchain has shown that every movement and the user executing the activity can be retrieved with all the relevant reference.

• Efficiency. All the relevant data can be put not place and extracted whatever is needed, therefore information can be easily extracted and generated to identify the relevant data or flow of it and future predictions.

• Decrease of the use of paper documentations.

• Decrease of the time spent on manually reconciling documents.

• Enablement of the fast and efficient KYC data verification processes.

To conclude from all impression and analyses made by the research and scholars, it can be amplified that the usage of the Blockchain as a secured, trusted, and transparent environment, which has a big potential. Especially for financial institutions, blockchain technology has a huge capacity for internal controls, also improving regulatory compliance. Hence, the AML-KYC processes would benefit from the applications if it implemented in the correct method. Nonetheless the negative impact and some risks may be faced according to competition law.

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Inga Vaitkunskaite
Senior Compliance Officer