Here’s an article submitted by Jitendra Rathod, newsletter contributing editor, that discusses the challenges of the current KYC processes at crypto exchanges and how UKYC can help.
Cryptocurrencies have already hijacked the debate about the Fintech sector because of their unconventional and disruptive approaches to finance, which is also why they have been able to make their mark. Initially, at the inception of cryptocurrencies, the users’ anonymity had been at the heart of the technology and all the systems.
The anonymity was not merely a decision to set itself apart from the conventional financial systems; it was a well thought out ethical decision. The aim of this was to include the under-banked into the financial system.
However, this did not work out too well for the crypto community; and soon cryptocurrencies were alleged to be mediums of money laundering and tax evasion. They were also charged with facilitating funding for illegal activities of various kinds. It soon became clear that in order to be able to maintain the legitimacy of the cryptocurrencies, the community will have to compromise some of its fundamental principles.
This lack of transparency of the crypto-based transactions led the regulatory authorities in several countries to tighten the rules regarding the joining and usage of crypto-based services. The exchanges thus now have to acquire information from the users in accordance with the KYC (Know Your Customer), and AML (Anti Money Laundering) norms set by the regulators of the respective countries of function. It is in this respect that different services are coming up to cater to the needs of the crypto industry.
Challenges with KYC/AML
While this provided the much-needed transparency to the cryptocurrency transactions, it also saw some resistance from within the community. One significant complaint against the KYC norms is the question of privacy. This question is, in fact, multifaceted.
Firstly crypto transactions are based on blockchains, that is to say, they are based on public ledgers. As a result, each transaction is added to the master ledger. When the thread of the transaction is traced to the source and matched with the real life identity of the individual, it reveals sensitive transaction information. Initially the real life identity of an individual could not have been located but with KYC it is possible to reveal the identity of a person owning an account.
In simple terms, before KYC there was complete anonymity for the addresses on the ledger, but with KYC a simple breach of trust can reveal all sensitive transaction details. Thus, uploading specific sensitive information, like address, name, and sex to name a few can significantly put the privacy of the users at risk.
The second risk related to privacy is that the user uploading his or her information on the crypto exchanges risks losing data to hacking attacks. While thousands of users are on these platforms, it becomes the responsibility of the exchanges to manage and secure these data, which are highly valuable. For a user using many platforms it becomes even more risky, to upload such data over several platforms.
Moreover, the process of seeking and managing such vast amounts of data is expensive and time-consuming. On average, a traditional onboarding process in the brick and mortar financial institutions in general takes between 10 days to 2 weeks. Now, even though crypto exchange platforms are far swifter and efficient in this task, it is still somewhat of a hassle for them to deal with such huge amounts of data. Thus, not only is this a cumbersome activity for the user, but the exchanges themselves find these norms to be a burden. They often realize that such regulations are making their functioning a challenge.
The exchanges which continue to function from the highly regulated regions find it increasingly difficult to focus on their core operations and have to channelize a large chunk of their resources towards the management of such data. This reduces the quality of the products.
Problems with Existing KYC Processes
There are two major problems with the existing KYC processes on the various crypto platforms:
- Different KYC for different exchange platforms: currently, every exchange has its own KYC process. As a result, in order to join different platforms the user has to undergo the verification process over and over again. So if a person holds accounts in 10 different exchanges, he/she has to submit physical or scanned copies of documents at all these places.
- Risk to safety:Since, the user has no way of knowing how his/her personal information is being used or handled, there is a serious risk to privacy. She has no option but to trust that this data (her photo, a photo of her passport, for instance) will be safe in the hands of the exchange and will be used only for the purpose it is intended.
UKYC: The Expanse Solution
The Universal Know Your Customer module created by Expanse as part of the Tokenlab ecosystem, is one of its kind, for it can be used for all those platforms wherever it is necessary to validate the identity of the users. The user has to fulfill all the KYC requirements on this platform in the beginning, i.e., at the time of signing up.
Once the KYC requirements have been fulfilled, the user gets a personal profile. On this platform, each user’s profile is given a badge in the form of a barcode. It is a single unified badge which is valid for all the platforms and exchanges requiring KYC.
The bar code can be scanned every time the user needs to provide the KYC. The information remains stored at one point and can be accessed by different kinds of firms, thereby saving the user from the hassle of repeated KYC verifications. Moreover, as the profile information is in the form of a barcode, the user can secure anonymity to some extent.
In this day and age of discussions about the safety of personal data and providing the same data over and over again, UKYC comes across as a kind of savior. It also reduces the processing time of the data, and makes the process more accountable to the user, who now knows where her data is being stored. In this way, UKYC is an efficient approach to KYC. It can also have a significant effect in providing stability to the unregulated, or poorly regulated, crypto market.