There’s no way for blockchain-based businesses, financial service providers or banks to bypass Know Your Customer (KYC) processes. But existing KYC solutions that have been developed over the years, such as manual and online identity verification, video and biometrics, have their drawbacks, including a high risk of error and effort duplication.
With the advent of blockchain technologies, companies are realizing that there are better, more efficient KYC solutions that let them avoid having to collect and store personal information.
Not your run-of-the-mill KYC solution
As blockchain technology matures, many people are looking toward decentralized identity or self-sovereign identity as an ideal — people will gain control over their digital identities and they’ll avoid having to provide excessive, unwarranted information.
Mechanisms already exist to help us reach that ideal. In web3, physical assets will eventually be owned by someone, but a digital-only relationship between the buyer and seller won’t suffice. There must also be a physical relationship so that a buyer has legal recourse to get this physical asset — a complexity most people are glossing over.
Select a provider that is transparent about what they do with their data and confirm that they’re doing all the checks you need.
That’s where blockchain can be used to improve on traditional KYC providers. Typical KYC processes require people to upload their proof of identity to a verifier. However, businesses working toward becoming more decentralized shouldn’t need this extent of information, nor should they require custody of a person’s tokens. Businesses must be able to simply and credibly confirm that an account or digital wallet interacting with them has been verified.
There are a multitude of off-chain KYC solutions that come with different capabilities and price points. The difference comes down to what level of detail and scale a company needs. The major downside of all these operations is the storage requirement from a regulatory perspective. Often, KYC and AML (anti-money laundering) details have to be stored for a certain time period to meet reporting standards and in case there are irregularities. This presents a major weakness in the system, as a company’s customer data is stored by multiple parties whose cybersecurity mechanisms may vary in effectiveness.