OCBC Bank, HSBC and Mitsubishi UFJ Financial Group (MUFG), together with the Infocomm Media Development Authority (IMDA), has become the “first consortium” in South East Asia to complete a proof of concept for a know your customer (KYC) blockchain.
The parties say the development “raises the possibility” of using blockchain to make KYC “more efficient and secured, thereby combating anti-money laundering (AML) and the financing of terrorism (CFT)”.
Know Your Customer (KYC) processes require banks to validate and verify primary documents as part of due diligence. Currently the market is flooded with KYC utilities that help manage these documents and share them with multiple entities. In some cases these utilities may even perform due diligence, but regulations are such that the task of due diligence and investigation is still handled by the client onboarding teams at financial institutions given the business and reputational risks involved. This KYC process can delay business as it can take 30 to 50 days to complete to a satisfactory level. Global efforts to prevent money laundering and the financing of terrorism are incredibly expensive for financial firms. In 2014 it was estimated that global spending on AML compliance alone amounted to $10 billion. Banks are also coming under pressure from investors and analysts to reduce cost, but many expect the compliance budgets to increase in the coming years rather than to decrease. Banks are also penalized through regulatory fines for failing to follow KYC guidelines.
A blockchain-based registry could remove the duplication of effort in carrying out KYC checks. The ledger could also enable encrypted updates to client details to be distributed to all banks in near real-time. The KYC ledger could also provide a historical record of all documents shared and compliance activities undertaken for each client. This will form the evidence to be provided to the regulators. SWIFT launched the SWIFT KYC Registry in December 2014, and more than 2000 banks have already enrolled with it and it is worth noting that the SWIFT KYC Registry does not use Blockchain and neither does the other large KYC Registry KYC.Com.
The prototype’s performance was tested between February and May 2017 for its functionality, scalability and security. They revealed the results today (3 October).
The consortium says the prototype remained “stable even with a high volume of information flow, was resistant to tampering by third parties and maintained confidentiality by permitting access to the ledger’s information only with legitimate authentication”.