In the past decade, the blockchain sector has emerged as a formidable element of the digital economy. This has led to a race by governments, institutions and businesses to incorporate the appropriate elements of these new technologies into their operations, to streamline performance and increase efficiency, as well as attract additional business opportunities.
In 2020 and 2021, Singapore looks set to become one of the world’s largest digital asset hubs as a result of progressive government regulations such as the Payment Services Act—which has attracted large crypto businesses such as Binance into the country, as well as rumours of traditional institutions such as DBS implementing an exchange for digital assets.
However, a recent study showed that Singapore, alongside the US and UK, had the largest number of virtual asset service providers with weak ‘Know your Customer’ (KYC) processes—making it easier for nefarious actors to launder money.
KYC processes are not only a legal requirement, but serve to allow organisations to detect and prevent criminal activities around the globe including money laundering and the financing of terrorism.
The importance of KYC is highlighted by the expense which financial institutions go to fund appropriate measurements each year—with approximately US$25 billion spent every year on financial crime risk management—the majority of this budget going to KYC processes.
It comes as no surprise that upholding KYC best practices is necessary for both the nascent digital assets industry and the traditional financial sector at large. This is especially important for a country like Singapore that is known for its progressive policies that allow institutions to explore innovations within the financial sector ranging from asset tokenisation to Central Bank Digital Currency (CBDC).
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‘Know your issues’ — The existing challenges in KYC processes
Despite the critical importance of KYC, current KYC methods are inefficient and plagued with manual, labour-intensive processes, thereby increasing the risks of duplication, human errors, and fraud. In fact, according to KMPG, it is estimated that up to 80 per cent of the efforts associated with KYC are dedicated to information gathering and processing, with only 20 per cent allocated to assessing and monitoring information for key insights.
On the receiving end, prospective customers are often frustrated by the sheer amount of back and forth, repetitive questioning, and lengthy processing times which KYC entails. Onboarding new customers to buy, sell, and trade crypto is crucial for the budding digital asset industry to further develop, but inefficient KYC processes have the potential to chase prospects away as a result of drawn-out approval times and endless back and forth on paperwork.
The good news is that emerging technologies such as permissioned enterprise blockchain platforms have the ability to solve existing KYC challenges not just for the digital asset space, but for the wider financial industry in Singapore.
Greater customer experience through efficiency
Blockchain, originally known as the underlying technology for bitcoin and other cryptocurrencies, reduces exponentially the amount of manual data processing necessary for accurate and reliable KYC. Instead, it allows financial institutions to access real-time, up-to-date customer information through a platform that is transparent, secure and immutable.
As the labour-intensive and time-consuming process of acquiring KYC information is reduced, financial institutions will benefit from increased operational efficiency, and resultantly become more profitable as manpower costs are reduced. A report by Goldman Sachs echoes this sentiment—stating that the banking sector can achieve a 10 per cent headcount reduction with the introduction of blockchain to KYC procedures.
Speeding up the customer onboarding process in a manner that is seamless and hassle-free also translates to a greater customer experience and satisfaction—as lengthy processing times become an issue of the past.
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Blockchain technology also allows financial organisations to put customer KYC details on a shared distributed ledger which can then be used by other accredited organisations—meaning customers will not have to start the KYC process from scratch when dealing with other financial companies.
As data stored on the blockchain is irreversible, transparent and secure, it would provide a single source of truth—reducing inefficiencies, errors and duplication of effort in information gathering between any financial organisations, as well as streamlining data gathering processes and providing relevant parties with secure access to customer data that is being updated in real-time.
Privacy concerns
While customers may have concerns over their information being shared through a platform with other financial institutions with which they do not have a relationship, certain blockchain platforms—such as permissioned blockchain platforms—enable the sharing of information in a private manner on a need-to-know basis.
With the increasing number of data hacks in Singapore in recent years—including local organisations such Singapore Red Cross, HIV registry, and SingHealth— it comes as no surprise that customers may have privacy concerns about the sharing of their personal and financial data.
Permissioned blockchain platforms are ideal for such purposes as they allow organisations to transact directly and privately, with strict authentication requirements to access private information—dis-intermediating and decentralising information without sacrificing privacy or security. Its popularity is evident with even central banks such as the Hong Kong Monetary Authority opting to use a permissioned blockchain platform, like R3’s Corda, as it enables enterprises to reap all the benefits of blockchain technology, while allowing transactions to remain private and only available to permissioned parties.
The future of KYC
As KYC forms the backbone of the financial industry’s anti-money-laundering efforts, it is evident that blockchain will lead us to reimagine KYC processes as we know them—offering businesses increased operational efficiencies and reduced costs, and customers smooth onboarding procedures and secure transfer of data.
At the same time, a blockchain-based KYC system could offer regulators greater clarity and understanding of how customers have been onboarded and the application of underlying KYC information—contributing to the development and legitimacy of the digital assets industry as it gains popularity.
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