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Using blockchain as a trustless network to trade and exchange goods and services represented as a cryptocurrency opens up all kinds of opportunities for people who wants to exchange. Anything can be represented in a cryptocurrency, and new markets that cannot efficiently run today, will pop up using this new technology. Second-hand markets where people exchange artwork as noted above, or cars, or houses, even the rightful heirs of your savings would be able to access what you leave behind using virtual assets as the bank vault.
Speaking of bank vaults and cryptocurrency, the banking sector is facing massive issues keeping up with their regulation and staying compliant with Know Your Customer (KYC) and Anti Money Laundering (AML) rules. Blockchain and cryptocurrency provides a solution to that. The problem faced by banks boils down to ancient technology, most often with bank’s records running on mainframe systems that dates back to the 60s. With increasingly complex rules and data regulation, these systems can’t keep up. The problem is aggravated by these systems being siloed databases that rarely share customer information, raising the risk for banks – large and small – stifling basic operations and delighting no one.
At present, the KYC and AML infrastructure mirrors guidelines implemented by centralized financial enterprises around the world. Just as traditional financial institutions require due diligence on prospective customers, cryptocurrency companies also rely on KYC and AML to collect personally identifiable information on individuals before allowing them to create new cryptocurrency wallets, do peer-to-peer lending, remit money across borders, or buy or sell cryptocurrency on an exchange. In the event a crime is committed, this information can be used to accurately pinpoint an offender and take appropriate action where necessary.
Through strong cryptography and by introducing decentralization, it’s possible to create protocol-level cryptocurrency rails to dramatically improve the handling of KYC and AML from a privacy and security perspective — all while reducing the cost of verification and clearing the barriers to mass adoption of cryptocurrencies and blockchain. On the blockchain – because of the way information is shared on a distributed ledger system, an archive of records, if you will – any and all information placed on it is secure, transparent and immutable.
A customer’s background, financial records, source of income, wealth and assets can only be placed on a blockchain once there is consensus across the whole network that all the information is accurate. It is extremely difficult for any false information to be submitted for this reason, and because each data entry is cryptographically hashed, it is very difficult to tamper with the information once it is verified and put on the blockchain. At the same time, personal information stored on a blockchain will naturally need to be GDPR compliant, which is discussed in this article.
Blockchain is not the regulatory minefield often being portrayed, rather it can be an asset in the regulatory armoury. Blockchain technology mitigates data ambiguity and reduces the potential for fraud. If all banks are on the blockchain, KYC and AML data can be shared across financial institutions in a manner that is secure, transparent and seamless. Further, immutability is a defining aspect of blockchain and one that paves the way for new levels of trust. With each unique KYC profile, there can be an auditable trail of activity that no-one is able to change or corrupt, not even bank employees. Moreover, the decentralized nature of distributed ledger technology — even in a private network — removes the risks associated with having single, central points of failure, thereby protecting data from hacks and other cyber-attacks.
For banks, the benefits are myriad: greater security, consistency and operational efficiency; increased interoperability between institutions; an end to costly, time-consuming duplication of data-gathering, data-processing and data verification; and, ultimately, enhanced regulatory compliance. For regulators, meanwhile, blockchain makes data on customer activity more visible and more reliable. And for the hard-pressed customer, blockchain-based KYC systems reduce on-boarding times and increase confidence in financial service providers. If we want to avoid scandals in banking that are borne of poor implementation of regulations — or worse, deliberate criminal activity — then blockchain provides an answer that governments and regulators would be unwise to ignore.
Beyond the banking sector, the real kicker for blockchain to push commerce into the future, is when large established players adopt this technology. Amazon and Google have already implemented blockchain in their cloud service offerings, and they are toying with the idea of letting customers issue virtual assets in the form of cryptocurrency. It will be exciting to follow these developments which will let consumers exchange virtually anything as long as it is put on a blockchain.