Do you know that KYC and its relationship with the blockchain? Let's learn together! by Karupanocitizen

The two fundamental pillars of the project created by "Satoshi Nakamoto", back in 2008, was to create a platform that would allow: first, direct financial exchanges between two people and second, confidentiality between the parties. These were the two elements that captured the attention of individuals to adopt the use of bitcoin.

Bearing in mind the above, anything that suggests the violation of these two basic principles is not well seen within the blockchain community, however, investors from centralized systems feel more comfortable when making exchanges with duly identified users, who could be the subject of lawsuits for breach of agreements. Due to this need, many platforms, to give their users more peace of mind, have decided to use KYC within their validation processes.

But, do you know what KYC is and how it affects the way exchanges are made on the blockchain? Right? Well, good! It is even becoming a requirement, imposed by some governments, for exchanges to be able to operate within their legal jurisdiction.

What is Know Your Customer or KYC?

The term "Know Your Customer" is an anglicism that means: "Know your Consumer", basically refers to the fact that companies must know the identity and particular data of the people, natural or legal (companies) with which conduct business, this as part of security measures to prevent fraud and scams.

The use of KYC procedures is due to the need to comply with legal requirements established for financial institutions to verify the identity of their clients, this among other things allows fighting against money laundering carried out by many criminal groups, terrorists, and even corruption operations in which large government authorities worldwide are involved.

The validation mechanisms created through the KYC have proven to be a fundamental tool to combat illegal transactions within financial exchange operations around the world, thanks to mechanisms that allow the clear and precise identification of all actors who participate in a financial exchange and thus be able to legitimize the legality of the transaction carried out.

How are KYC procedures performed?

To effectively execute KYC programs, financial institutions or exchanges must first collect information about the identity, financial and legal data, as well as the particularities of each of their clients, through the use of forms and other digital mechanisms.

Once all the required information has been processed and its veracity and accuracy have been validated, the user is asked to arrive in person or remotely, with the official or legal documents that prove it, such as national identity documents, passports, bank certifications; It has even been established, in some cases, the use of additional biometric checks, such as facial or fingerprint recognition, which allow the holder of the document provided to be recognized.

By verifying this data and determining the Digital Identity, banks and other companies, required by law to apply KYC procedures, can associate their customers' data with their information processing systems and establish a profile of themselves, to theoretically infer what the expected behavior of their accounts should be and detect suspicious or misplaced movements.

In short, the KYC system is based on real-time identification of a customer's data, comparing the data provided with the compiled identification documents, as well as comparing them with other third-party databases; the creation of a pattern of expected behavior and the constant monitoring of the activity to determine if said behavior corresponds to the expected one.

Confidentiality as the foundation of the Blockchain

As we pointed out in the introductory paragraph, one of the pillars on which the creation of Bitcoin by Satoshi Nakamoto was based, was precisely to have a tool that would allow the realization of economic exchanges anonymously between two users, in a similar way as they are carried out. cash transactions in fiat currencies in the real world, in this sense their idea of confidentiality was not linked to the fact of covering up the performance of criminal or illegal acts.

To carry out exchange operations from cryptocurrencies to fiat currencies, or to acquire other crypto assets or when paying for services and purchases using any cryptographic token, we must identify ourselves within the Exchange or the mechanism that we use to carry out the transaction, so by using statistical and mathematical methods it is possible to determine the identities that underlie each user of the blockchain.

This situation has led to projects designed to protect the anonymity and identity of users, such as Monero (XMR) and its “ring signature” or Zcash (ZEC), which uses a cryptographic technique known as zero-knowledge proof (zk-SNARKs), designed exclusively to protect the identity of those involved in a certain transaction.

The blockchain and its usefulness in the use of KYC

As we have already seen, KYC procedures are very important in the prevention of online fraud, identity theft, money laundering, or prevention of electronic crimes, however the centralization of data, and the necessary use of the infrastructure of computer support equipment. , as well as the need to create exclusive software for this type of centralized database, brings to institutions and companies cost problems, slow processes, vulnerability to cyberattacks and system manipulation, inconveniences that are easily possible to solve through the decentralized databases offered by the blockchain.

That is why, in my opinion, instead of representing an antagonistic element, the blockchain is presented as the ideal tool to streamline KYF processes, in terms of online validation, given its transparency, robustness, dynamism, and profitability of decentralized systems. This could streamline and make more efficient and secure activities such as the provision of services or the acquisition of goods, buying an airplane ticket, opening a bank account, obtaining or paying a mortgage loan, or obtaining and validating a driver's license, for instance.

Now I would like to know what is your opinion regarding this issue, what do you think of KYC as a crime prevention mechanism within the digital environment? Are KYC mechanisms necessary for the execution of activities within the blockchain? Do you consider that the blockchain can be useful for the implementation of process validation mechanisms in centralized environments?

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