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.

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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.

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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.

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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.

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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.

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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?

We keep reading!

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Happy new week @karupanocitizen, what an excellent post about KYC. To me KYC is a good tool that helps in knowing your customers. Just like what @luckyali said it is good to some extent and it is also bad to some extent. When it comes to the blockchain we all knows that everybody wants to be anonymous while making money but at a point in time the fraudulent activities has increased so badly, if KYC will curb that aspect then it will be amazing.

Happy start of the week to you too friend @ tfame3865, thank you very much for your nice comment.

Indeed, depending on how you look at it, the KYC can have its positive side and its negative side. However, it is convenient for all of us that more and more users join blockchain platforms, the generalization of their use would make all cryptocurrencies more stable and profitable and the safety factor is one of the things that further distance users.

I believe that the blockchain has the potential to establish identity validation mechanisms, without such data being exposed to everyone.

Thank you very much for your valuable comment !!

What a very lovely publication about KYC @karupanocitizen. I must not be skeptical here but the fact is that I have really learnt a lot about KYC while reading your write up. I think this is one of the reasons most top cryptocurrency exchanges like Binance, Coinbase and Co don't joke when it comes to verifying users information via KYC and there's even this latest announcement released it Binance that every binance users who haven't verified their account are liable to get blocked on the platform. This has really shown how KYC is extremely important to some crypto companies or top exchanges.

Thanks for sharing this great post with love from @hardaeborla and I hope you have a great day ahead 💕💗💕

Thank you very much @hardaeborla, thank you very much for such a nice comment, in fact most of the main exchanges are requiring their users to perform the KYC procedure, this because in addition to offering security to other users, the truth is that many countries have threatened to ban the use of these exchanges if they do not require such procedures from their users.

Have a very beautiful day too !!

Hello @karupanocitizen, What valuable information you have shared with us today, actually or I knew very little about the KYC protocol of financial institutions and some well-known exchanges.
Now if we can be clear about how necessary it is to comply with this requirement how valuable is the personal and confidential information that we provide when they ask to activate the KYC.

Thanks for this valuable informative post.

Thank you very much to you @tocho2 for taking the time to read my publication, indeed it is good to know about this type of procedure because it helps us understand why it is applied by banks, finance companies and now by exchanges.

Thankful for your kind comment !!

Hi @karupanocitizen
It is true, there is a need to safeguard our data and our identity, and that possibility is provided by the Blockchain, however, there is something that becomes a problem and sometimes identity verification becomes necessary. Let me give you an example:
6 months ago I was able to publicize a case of a user who made life on this platform, in this Project Hope community and who had 4 accounts, he published with all of them in the community. We realized it because the brute used the same exchange house to change from Steem to Bolivars, so if we had applied KYC before, we would not have allowed him to abuse for so long, he removed or decreased the possibility of support to other users.

Likewise friend @ josevas217 there are situations like the ones you describe in which the KYC procedures are very useful to avoid fraud like the one you propose, I understand that users are reluctant to this type of tools because they feel that it violates our privacy, but .. . We forget that the blockchain is the world of bots and smart contracts ?.

In my opinion in this environment there is the possibility that the information of any user can be verified, keeping said information encrypted and cannot be used by other means, something like ... would you be able, just by seeing a fingerprint know what? Who belongs? ... in the same way our information can be encrypted to be read by certain algorithms when invoked by a smart contract ... I think.

Greetings friend. An important and controversial issue in blockchain, on the one hand it is important to defend anonymity and decentralization which are the pillars of this system, but it is certainly important to avoid abuses of those virtues to commit criminal acts, that is why means such as KYC identification are appropriated as long as only the user data is used to avoid abuses and not to make them known to a centralized organism.

Greetings friend @emiliomoron, I fully agree with your opinion, however in the blockchain world we have a great advantage with respect to centralized mechanisms, the use of cryptography in all our processes, that could guarantee the protection of our identity without reaching be anonymous for the verification of the respective security systems.

Greetings my friend

Hello friend thanks for educating us a little about it, it is always important to know a little more about the aspects that come integrated with the blockchain, no doubt KYC can prevent and scams and money laundering as you rightly mention, I think that has as it progresses are taking the necessary correctives to maintain transparency in the crypto market.

See you later brother, have a great weekend.

Greetings my friend @amestyj, well here we are learning together, thank you very much for your valuable comment. Indeed, the KYC procedures allow the prevention of fraud, scams and the identification of criminals, however, I consider that in order to maintain balance within our blockchain environment, more and more decentralized projects must be offered that allow such processes to be carried out while preserving the confidentiality of our data. .

Have a very happy start to the week

You've got a free upvote from witness fuli.
Peace & Love!

Good morning @karupanocitizen
The two elements that you have shared in the beginning in the post are the bases, and in other words you can say reasons that gave birth to bitcoin and decentralized crypto-blockchain. Decentralization is the major aim of crypto currency and blockchain technology. Short and clear definition is no third party. Anyway, KYC is important to solve the issues like money laundering,terrorism ETC. But at the same time it is risky too for the users.
Great explanation my friend keep sharing more posts like this.

Thanks to you @luckyali for the positive evaluation of my post.
Indeed, it seems that KYC processes are a double-edged sword within the blochain environment, however, I consider that within this environment we have all the necessary tools (from which centralized platforms suffer) to be able to carry out these processes without significantly affecting the protection of the identity or other data of the users, except in those cases in which their identification is vital (as in the case of hacks for example)

Can you imagine a "virtual blockchain police" capable of encrypting and decrypting data and protecting all crypto assets? XD

I think I was daydreaming, but it can be a good script for a blockchain movie right? ;)

Nicely shared KYC are very important as it makes or improve customers confidence in any financial settings it also help reduce rate at which users create double accounts.

It is also @mccoy02, well managed KYC is a very valuable tool for the protection and security of users on exchange platforms, for example, thank you very much for your opinion