Blockchain technology helps enable reusable KYC solutions

Last updated: May 23, 2024 1:01 pm EDT | 6 minute read

Know-Your-Customer (KYC) solutions are becoming increasingly important for crypto firms, financial services companies and institutions.

Found the Grand View search that the global KYC software market size was valued at $2.93 billion in 2021. The number is expected to increase at a compound annual growth rate (CAGR) of 20.8% over the next six years.

The Grand View Research report also highlighted the growth of the KYC market, which can be attributed to the importance of compliance management and the growing number of identity-related frauds in financial institutions. The rise of deep fakes and artificial intelligence (AI) scams. it is also leading to greater adoption of KYC.

The problem with traditional KYC solutions

While KYC is an important requirementthe process often represents a burden for both users and businesses.

Riley Hughes, co-founder and CEO of digital identity startup Trinsic, told Cryptonews that KYC users typically have to provide a photo of themselves, along with identification.

As KYC becomes more common, Hughes pointed out that users typically have to repeat this process multiple times.

“A person will probably have to do KYC about ten different times across multiple apps and platforms,” Hughes said. “But statistics show that asking users to verify themselves using a photo of a plastic ID card results in a drop of up to 40%.”

Vishal Kapoor, chief operating officer of blockchain technology firm Chia Network, also told Cryptonews that KYC is expensive to implement.

A recent article from Betanews said KYC measures amount to 40% of all anti-money laundering (AML) compliance costs, totaling $5.7 million per year for banks.

Reusable KYC gains traction

Given these challenges, reusable KYC solutions have started to gain ground.

“Reusable identification, or KYC, allows users to leverage past verification instead of having to re-verify themselves across all platforms,” Hughes said.

To put that into perspective, Hughes explained it Trinsic recently launched an “identity acceptance network” that enables reusable KYC.

“Businesses can now use Trinsic to verify 60,800,000 people 10 times faster than an identity verification done from scratch, while reducing fraud,” he said.

Hughes explained that businesses include CLEAR – the technology company that handles biometric verification of travel documents at major airports – along with others, has partnered with Trinsic as part of the Identity Acceptance Network.

“The goal behind this network is to get users verified via KYC as quickly as possible to meet the enterprise risk threshold,” he said. “If users have already been verified by a company in the network, we try to direct other companies in the network to that verification.”

For example, if a CLEAR user has a CLEAR verification, they can use it again for other platforms within the identity acceptance network.

Blockchain for reusable KYC

While reusable KYC solutions can save users and businesses time and money, adding blockchain to the mix allows users to own their personal information and data.

For example, identity technology company Dentity is part of Trinsic’s identity acceptance network. Dentity CEO Jeffrey Schwartz told Cryptonews that the platform stores user credentials on the Bitcoin blockchain.

“We store decentralized identifiers (DIDs) on-chain to verify the authenticity of issuers,” Schwartz said. “The only thing that needs to be on-chain is what is needed to verify a credential.”

Chia Network is also doing this. According to Kapoor, Chia’s Verifiable Credentials (VC) allows a KYC provider to perform KYC by issuing a verifiable credential token on-chain.

“This allows service providers, like Dapps, to verify that a user has undergone KYC verification with a trusted KYC provider, without requiring the user to reveal any personal information,” he said.

Kapoor explained that people are looking for better protection of their personal information as identity scams increase. Panda Security statistics prove it over 10 billion personal bests have been exposed globally due to data breaches since March 2020.

“Using on-chain VC and DID, the individual can custodian their VC and decide who it can or should be shared with, without risk of oversharing or data exposure,” Kapoor said. “This also reduces external touchpoints with their sensitive personal information.”

Blockchain protects user data

While it is noteworthy that reusable KYC is gaining traction, some concerns remain. For example, a recent Reuters article highlighted this criminals can still quickly exploit automated KYC controls, putting a user’s information at risk.

Data storage on the chain try to solve this problem. For example, Deloitte Switzerland has started issuing reusable KYC credentials last year to enable access to global fundraising of digital assets. Polimec, a decentralized financing protocol developed on Polkadot, has collaborated with Deloitte Switzerland to enable this functionality.

Luca von Wyttenbach, co-founder of Polimec, told Cryptonews that a KYC credential allows users to establish a self-sovereign digital identity validating their data once they have Deloitte.

“After Deloitte issues a KYC credential, which is kept under the control of the user, they will be able to use it with several online services, the first of which is Polimec,” Wyttenbach said.

He added that the website or service provider can rely on the shared data as it has been approved and certified by Deloitte.

“This means that users need to share only the minimum necessary data about themselves,” he noted.

Wyttenbach further explained that Deloitte’s KYC credentials are anchored to the KILT protocol. He noted that Deloitte conducts client KYC and is the only party that receives and stores such data. Next, the data is created into a KYC credential, which is hashed and stored in the user’s Deloitte wallet.

“The hash is pegged to KILT, meaning no personal information is stored on the chain. Users can verify their data against the hash by presenting their credentials,” Wyttenbach said. “In short, credentials are pseudonymous: therefore, all transactions and network participants on Polimec can be processed in a secure and regulatory compliant manner, preserving data privacy.”

Challenges can hinder adoption

Although reusable KYC solutions are currently being used on the blockchain, challenges are still present.

For example, Julian Leitloff, co-founder of decentralized identity platform idOS Network, told Cryptonews that encouraging widespread adoption of reusable KYC solutions among users and service providers is a major obstacle.

Echoing this, Schwartz noted that Trinsic’s Identity Acceptance Network requires collaboration.

“The idea behind this is that we all share user credentials,” he said. “I hope this collaboration will allow us to achieve this goal, but interoperability is key here.”

Hughes is aware of this challenge. He shared that Trinsic’s identity acceptance network currently covers over 60 million users, but believes the platform needs to move forward aggressively.

“Everyone in the EU will soon have access to a digital identity wallet,” said Hughes. “We will have to implement the same standards in the future.”

Additionally, Leitloff highlighted that another major challenge related to reusable KYC includes ensuring data privacy and security.

“Because user data must remain private and secure even when shared across multiple platforms,” he said.

To address these challenges, Leitloff explained that idOS is implementing advanced encryption techniques such as Zero-Knowledge Proofs (ZKP) AND Secure Multigame Computing (MPC) to protect user data.

“Promoting the use of standardized identity formats such as the W3C Verifiable Credentials ensures consistency and interoperability,” he said. “Using decentralized storage networks will also enable data availability and reduce the risk of centralized points of failure.”

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