Saturday, January 28, 2023

The integration between Blockchain and KYC might pave the way for cryptocurrencies to achieve mainstream status while safeguarding against fraudulent financial activities.

  • Blockchain technology has remained on the rise in the last few years.
  • KYC is a standard imposed by regulatory authorities worldwide.
  • A blockchain and KYC collaboration might come in handy in reducing inefficiencies and duplication in KYC procedures.

The growth of blockchain and the intersection with KYC

Blockchain technology has remained on the rise in the last few years. One of blockchain’s enabling ventures, cryptocurrency remains a lucrative and tempting investment for many consumers fascinated by its decentralised structure. Nevertheless, blockchain has not yet achieved actual mainstream status.

Cryptocurrency has a unique attribute in that banks or government agencies do not control it. As such, users have a guarantee regarding their privacy. However, as the industry expands at an exponential pace, it becomes natural for concerns to arise.

The blockchain sector faces various challenges, including balancing user privacy with financial regulatory requirements. This issue is particularly complicated since one of blockchain’s most compelling features has been the security of user data. Expectedly, governments are concerned about the effect of anonymity on financial systems. Some in Europe and the United States even want more supervision over the blockchain business.

READ MORE: Decentralized finance: Redefining financial transactions in the digital economy

The industry’s need for increased regulation and transparency, mainly focusing on Know Your Customer (KYC) requirements, has upset some people. Some customers have had to abandon blockchain’s central trading desks in favour of decentralised trading centres. Consequently, central trading desks have lost many clients due to privacy issues.

Despite these reservations, blockchain and KYC could be a perfect pairing. Some industry professionals feel that effectively incorporating KYC into blockchain systems is not bad. Indeed, making blockchain more compliant may help it become more popular, attracting more users and avoiding expensive regulatory fines.

KYC verification is a fundamental principle of financial services compliance. Several bitcoin trading companies have already adopted the concept. KYC and blockchain integration might pave the way for cryptocurrencies to achieve mainstream status while safeguarding against fraudulent financial activities.

Understanding the role of KYC

KYC is a standard imposed by regulatory authorities worldwide. The standards compel financial institutions to keep an eye on their customers for evidence of unlawful activity as part of long-standing anti-money laundering (AML) procedures.

Banks, investment firms, fintech businesses, and others that deal with a high volume of financial transactions must conduct due diligence and an identity verification procedure to gather extensive KYC data from new clients and set rules for third-party transactions.

Anonymous financial transactions make it easier for unscrupulous actors to carry out illicit operations. While it is fair that consumers wish to keep their data private, sharing that information with financial institutions also protects their interests.

Many bitcoin transactions are now exempt from the KYC regulation. However, this condition may damage the industry’s well-being rather than foster development. With more individuals demanding regulation, government involvement in cryptocurrency will grow in the coming years.

KYC and cryptocurrency

KYC and Cryptocurrency

The present state of KYC and cryptocurrency is unstable. [Photo/one37pm]

The present state of KYC and cryptocurrency is unstable. Crypto users can purchase cryptocurrency without completing KYC. However, they may be better off choosing an exchange with KYC requirements to safeguard their interests.

Decentralised exchanges and crypto ATMs are the most common methods for purchasing cryptocurrency without KYC requirements. Peer-to-peer crypto trades may also be helpful.

However, crypto rules keep evolving. To ensure regulatory compliance, regulators now demand crypto exchanges apply KYC requirements and AML procedures.

Standards in Africa and other developing economies are lower than in Europe, where a particular regulation does not regulate a crypto-to-crypto-only exchange. In some instances, the EU requires compliance steps. Requirements continue to be a global mixed bag.

The question of whether KYC is beneficial to cryptocurrency is a complex one with significant implications. Crypto traders have historically valued their privacy, refusing to reveal personal information to crypto companies or the authorities.

Crypto consumers may believe that KYC checks are unnecessarily intrusive during the onboarding process. Even if it is simple data collection and just a few seconds of waiting for real-time authentication, demanding identity confirmation influences the user experience.

On the other hand, customers that engage with conventional banking and investing institutions are already used to KYC and AML processes and hardly ever perceive them to be a problem. The minor inconveniences of KYC processes should not deter most consumers from engaging in bitcoin transactions. Numerous areas of the industry already comply with these regulatory mandates.

The most significant benefit of KYC checks for cryptocurrencies is that they guard against illicit activities such as money laundering and terrorist funding. The anonymous nature of crypto transactions exposes the sector to criminal allegations, which may deter some investors.

The vast majority of customers want to be connected with financially regulated operations. As a result, adding KYC checks may encourage mainstream customers to adopt cryptocurrency to a larger extent. Bad actors will also keep off blockchain for unlawful objectives.

Blockchain and KYC have a complementary relationship

Undoubtedly, KYC processes are the mainstay of efforts by financial institutions to deal with fraud and other illegal acts. As per global estimates, KYC spending stood at $1.2 Billion in 2020. With massive amounts spent on bettering KYC, many people could assume that the processes are issue-free and impregnable.

Despite the significance of the procedure, KYC remains highly inefficient.  Due to time-consuming and labour-intensive duties, a significant scope of effort duplication, and the risk of error, experts estimate that 80 per cent of KYC efforts go to information gathering and processing. In comparison, only 20 per cent goes to monitoring and evaluation.

The present KYC procedure has failed to accomplish its goal for financial institutions with the tedious, lengthy, and monotonous experience for consumers.

A ray of optimism comes from numerous financial institutions and service providers attempting to fix the problems by combining next-generation technologies such as cognitive technology and artificial intelligence. As such, a blockchain and KYC collaboration might come in handy in reducing inefficiencies and duplication in KYC procedures.

Increased regulation in crypto and financial structures remains likely. Therefore, industry players must plan for these changes and appreciate how they might benefit blockchain technology. KYC, for example, may benefit blockchain by improving its integration with current financial and commercial systems. Businesses previously reluctant to accept cryptocurrency may be more likely to trust it now that it is effectively regulated.

On the other hand, blockchain and KYC can collaborate for more efficiency in validating information and identifying complex financial irregularities. To match the complexities of blockchain transactions, KYC will need to create more technologically advanced solutions. Combining these objectives necessitates using KYC and AML compliance solutions to automate KYC during onboarding and offer authentication for existing users.

READ MORE: Blockchain startups are on course to make Africa a crypto continent

 

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