Decentralized KYC (dKYC)

KYC (Know Your Customer) is a process of verifying the identity of clients for companies that offer financial services such as banking, credit cards, and insurance. It’s also known as customer due diligence (CDD).

KYC is a major pain for businesses and individuals alike. To meet the requirements of KYC, companies have to store sensitive data on their servers and are often faced with a lack of secure storage options. The process of collecting information from customers can be time-consuming and expensive, and it’s difficult to ensure that all parties involved adhere to the same security standards.

In the traditional model, a trusted third party (the regulator) is required to validate identity information. This model has many weaknesses:

1. Data security risk: Centralized systems often store large amounts of sensitive data in a single location, making them vulnerable to data breaches and cyber-attacks.
2. Single point of failure: If the centralized system goes down or experiences technical issues, it can disrupt the entire KYC process and cause delays for customers.
3. Lack of privacy: Centralized systems can potentially allow unauthorized access to customer data by parties such as governments or hackers.
4. Inefficient: Centralized KYC processes can be time-consuming and inefficient, as they often require customers to submit the same information multiple times to different organizations.

On the other hand, decentralized KYC has a few solutions:

1. Increased privacy: In a decentralized KYC system, the personal data of individuals is stored on a decentralized network rather than on a central server. This means that the data is not accessible to a single entity and is therefore more secure.
2. Greater control: Decentralized KYC systems give individuals greater control over their personal data. They can choose to share their data with only certain organizations and have the ability to revoke access to their data at any time.
3. Improved efficiency: Decentralized KYC systems can streamline the onboarding process for businesses and organizations by automating the verification process and reducing the need for manual data entry. This can save time and resources for both the organization and the individual.
4. Lower costs: Decentralized KYC systems can potentially reduce costs for businesses and organizations by eliminating the need for expensive infrastructure and software to store and manage personal data.
5. Increased accessibility: Decentralized KYC systems can potentially provide access to financial and other services to individuals who may not have access to traditional KYC processes due to a lack of identification documents or other barriers. This can improve financial inclusion for underbanked populations.

Here are some real-world examples of decentralized KYC:

• The Estonian government is using dKYC to enable its citizens to access e-services more easily. By storing identity information on a blockchain, citizens can easily and securely access government services without the need for multiple passwords and login information.
• The Bank of Lithuania is using dKYC to streamline the onboarding process for new customers. By using blockchain technology, the bank can verify the identity of its customers more quickly and efficiently.
• Swiss insurance company Acatis Invest is using dKYC to verify the identity of its customers and prevent fraud. The company claims that the use of dKYC has helped it to reduce its onboarding time from several days to just a few hours.

In conclusion, decentralized KYC has the potential to streamline the identity verification process and increase privacy, but it also comes with its own set of risks and challenges. As technology continues to evolve, it will be interesting to see how dKYC is adopted by businesses and governments around the world.