Tag: Banking

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Blockchain Use Case: Know Your Customer and Anti-Money Laundering

Recent studies show that it costs about $6,000 for a financial institution to onboard a new client. Moreover, collating the data of the new customer may end up taking 2 to 4 weeks, depending on a country’s regulation.

Recent studies show that it costs about $6,000 for a financial institution to onboard a new client. Moreover, collating the data of the new customer may end up taking 2 to 4 weeks, depending on a country’s regulation.

Recent studies show that it costs about $6,000 for a financial institution to onboard a new client. Moreover, collating the data of the new customer may end up taking 2 to 4 weeks, depending on a country’s regulation.

Unfortunately, financial institutions cannot avoid these costs entirely since there are mandatory laws requiring banks to record details of all their customers. These laws are commonly known as know your customer (KYC) and anti-money laundering (AML) policies that are enforced by the government under the Bank Security Act. Essentially, the laws are meant to deter illegal financial activities such as financial identity theft and tax evasion. 

Maintaining compliance with these regulations usually involves tedious paperwork alongside the numerous and expensive costs involved in the process. Additionally, clerical errors when collecting customer’s personal details may lead to inefficiencies in collating the entire data. 

With the advent of blockchain technology, KYC and AML compliance can be made easier and cost-effective by leveraging the abilities of smart contracts and decentralised applications (dApps). 

But before we can look at how Blockchain can help organisations maintain compliance, let’s first understand the current state of KYC and AML laws.

Know Your Customer and Anti-Money Laundering Policies 

Organizations, particularly those in the finance industry, are required by law to check the identity of their clients before and during doing business with them. This concept has even been extended to other business models – accelerated by the predominance of corruption, financial terrorism and tax evasion cases. Know your Customer (KYC) policy also protects customers from crimes such as financial identity theft. 

On the other hand, Anti-Money laundering (AML) law is designed to stop criminals from making money through illegal activities. It also makes it possible for banks to detect and report suspicious financial crimes. 

Currently, institutions maintain KYC and AML systems via digital accounting and hardcopy files. This creates room for errors either by the task force managing the information or technical failure of the devices being used.

It becomes even harder for multi-national corporations given the sheer amount of time required to verify and collate numerous data. When you factor in the operational costs and the time required to ensure the process flows seamlessly, it’s easy to see why blockchain technology can be of much help. 

How Blockchain can be Used to improve KYC and AML Compliance

Blockchain technology is a decentralized, immutable and distributed ledger that records transactions chronologically in near real-time.  These are characteristics the financial industry can tap into to improve KYC and AML compliance. They can do this in the following ways: 

  • Distributed Client Data Collection 

Using Blockchain, a KYC and AML registry can be created; through which only authorised banks and financial institutions will have access keys. This will help accelerate a client’s onboard process since each time an institution needs the client’s details, they’ll only have to request for the private keys to access the data. 

Simply put, the technology will simplify data gathering, processing and verification which translates into saving more time and money compared to traditional KYC systems. Reduced onboarding time through blockchain-based KYC systems also increases confidence in the financial service provider.

Additionally, the newfound interoperability in terms of sharing data means that banks and regulators will communicate efficiently, thus, improving compliance. As such, regulators will be notified of violations in real-time and respond almost immediately. 

  • Data Protection and Management 

Identity theft, being one of the most common financial crimes, can easily be mitigated by a blockchain-powered KYC system. When a customer feeds their background information into the blockchain ledger, the data is cryptographically hashed; making it impossible for anyone to corrupt or change it in any way. The security is further improved by the decentralized nature of the ledger technology, thereby eliminating the risk of cyber-attacks which are associated with having data held in a central location. 

Thanks to the improved security, data interoperability can safely be executed  unlike when using  traditional siloed KYC infrastructures. As such, banks don’t have to process data all over again every time a client uses a different product/service under the same bank. 

  • Less Paperwork 

Incorporating Blockchain into the current KYC and AML registries can digitize the existing infrastructure. This is achieved by using smart contracts that create, read, and verify client details automatically, reducing the cumbersome paperwork involved in the traditional process. 

In the current KYC and AML systems, a client’s background information is stored separately in various institutions like banks, hospitals, and motor vehicle registry servers. This means that a new customer has to fill in loads of paperwork when using services offered by these institutions. Further, in case a customer switches from one bank account to another, the new one has to conduct a KYC procedure again resulting in tiring paperwork for both the client and the bank. 

Blockchain can solve this by providing a distributed ledger where all the client’s details are stored and can be accessed by various institutions. 

  • Revamp KYC and AML Procedures

Blockchain is a relatively new technology that is still finding use in various industries. As such, it’s incorporation into KYC and AML procedures can upgrade the current systems to stay up to date with the new technology trend. This is essential for institutions considering the increasing demand to create mobile apps to allow users to access services remotely. The apps come with security flaws, e.g. vulnerability to hacks, which can be best solved by blockchain cryptography algorithms.

Besides, as institutions continue to extend their market outreach, upgrading to blockchain KYC solutions is an ideal way to step up their current infrastructure to accommodate the growing number of customers. At the same time, considering that tax fraudsters are always devising new ways to commit crimes, adopting blockchain solutions upgrades security measures to counter the new threats. 

Conclusion

Blockchain solutions bring in the much needed efficiency into the customer due diligence process, saving an institution’s money and time. Consequently, these resources can be channeled to other core administrative operations, improving the overall service delivery. Ultimately, financial crimes and compliance violations will be reduced in the long haul. 

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Crypto Daily Topic

How Decentralised Finance is Redefining the Banking Industry

In the last few years, the concept of decentralization has gained a lot of attention across all industries. This has been fuelled by the entry of blockchain technology, which has supported the growth of numerous cryptocurrencies. 

In the last few years, the concept of decentralization has gained a lot of attention across all industries. This has been fuelled by the entry of blockchain technology, which has supported the growth of numerous cryptocurrencies. 

In the last few years, the concept of decentralization has gained a lot of attention across all industries. This has been fuelled by the entry of blockchain technology, which has supported the growth of numerous cryptocurrencies. 

Decentralized finance, in particular, has become a widespread concept driven by the public’s disillusionment with the centralized financial system. This is especially true given the alarming rate of cyber-attacks, which often leave individuals at risk of financial loss and personal data exploitation. 

Besides privacy concerns, decentralized finance has the potential to extend access to financial services to the 1.7 unbanked population. It faces fewer barriers than traditional banking services, prompting start-ups to take up open source finance to bridge the existing market gap. 

What makes Decentralised Finance a Better Choice

Decentralised Finance (DeFi), is an ecosystem of financial solutions built on top of a blockchain network. At their core, these solutions bring in the permissionless and transparent nature of blockchain into the financial industry. This means that users are given absolute control of their assets and can interact with other users through peer-to-peer transactions, thereby eliminating the need for a central authority. As a result, financial services become more affordable and frictionless compared to traditional banking services. 

Additionally, unlike centralized financial services, DeFi doesn’t require complex infrastructure to reach the general public. In fact, as the internet penetration rate increases, so does DeFi become accessible to everyone since it’s internet-based. 

Decentralized Finance Use Cases

There already exist several solutions that provide open-source financial services. These solutions fall in 4 major categories: 

i) Borrowing and Lending

Open source borrowing and lending services are the most popular application in the decentralized finance ecosystem. Thanks to the lack of a central authority, these solutions make borrowing and lending affordable, faster, and more accessible. In some cases, your credit score may be overlooked, especially when you agree to collateralize your digital holdings. 

ii) Monetary Banking Services

Decentralized finance is fintech applications offering monetary banking services. This means that the applications can serve as issuance platforms. Currently, most DeFi applications focus on the issuance of stablecoins, insurance mortgages, and securities. 

By offering stablecoins, DeFi applications contribute to the maturation of the blockchain industry since the stablecoins are less volatile. This makes it possible for the coins to be used by merchants and investors as a store of value. 

DeFi’s entry into the mortgage and insurance market has helped eliminate the role of intermediaries. This has reduced the underwriting and legal fees in the case of mortgages. At the same time, it has helped lower the cost of premiums in the insurance market by spreading risk among the parties involved. Also, DeFi applications make it easy for companies and businesses to launch and issue tokenized securities to investors. Other platforms allow the creation of blockchain-based derivatives and synthetic assets, contributing to the growth of the financial industry as a whole.

iii) Decentralized Marketplaces

Decentralized marketplaces are relatively new in the industry, as evident from their limited share of the market. However, as more people come to appreciate anonymity and privacy, decentralized marketplaces will rise in popularity. 

These marketplaces are peer-to-peer platforms that allow users to trade assets without the need for a trusted intermediary to hold their funds. All trading transactions are automatically executed by smart contracts. As such, they have lower trading fees and require less maintenance compared to their counterparts. 

iv) Payment Processing

Sending payments, especially across borders, has long been a major pain point for business and those working overseas. The biggest problem facing these transactions is the expensive amount of fees charged by banks and traditional payment processors for sending remittances. 

With the likes of the Stellar blockchain leading the way, DeFi is committed to making cross-border payments more affordable. In turn, businesses will extend their market outreach now that they can accept payment from customers across the world. 

Why Hasn’t Decentralised Finance Skyrocketed?

Given the numerous advantages of DeFis, one would expect it to have gained massive usage. Unfortunately, this hasn’t been the case – based on the 25 million cryptos users against the 1.7 billion unbanked population. This is due to the following challenges:  

  • Scalability 

Scalability has been the biggest problem facing the entire blockchain industry, and decentralized finance applications are no exception. Currently, DeFi applications can’t process as many transactions as traditional financial services can. For instance, Visa can process about 24,000 transactions per second, which is way more than 15 transactions processed by Ethereum DeFis in one second. If decentralized finance applications and the blockchain industry, in general, is to appeal to the world, then developers must work on improving the bandwidth to handle more transactions. 

  • Technical Risks

In their simplest form, DeFi applications and the blockchain network are pieces of software. As such, they are prone to bugs and hacks undermining their growth. A good example is the Ethereum blockchain, whose ERC-20 standard is plagued by constant bugs that render applications built on it inefficient. Also, there have been several DeFi applications that have been hacked, creating uncertainty among crypto enthusiasts. 

  • Manipulation

Since DeFi applications are currently unregulated, the market remains vulnerable to manipulation. In the traditional banking industry, manipulation is almost impossible thanks to the strict monitoring and regulations put in place by authorities. 

The most common practice is the manipulation of price feeds, also known as oracle manipulation. Oracles, in this case, refers to third-parties that supply blockchain with a particular type of data. For example, the Ethereum blockchain doesn’t determine the price of ETH. The price is determined by oracles, such as exchanges. 

Oracle manipulation occurs when a DeFi app uses only one or a limited number of exchanges as the only source of data. This means that traders can trade large amounts of cryptos to sway the price movements, thereby manipulating the information provided by the oracle ( exchange).

Conclusion

There’s no doubt that decentralized finance is set to become the future of the financial industry. But for it to mature and appeal to all stakeholders, decentralized finance needs to mitigate the hurdles hindering its growth. Moreover, DeFi applications are working independently of each other, which fragments the market. Perhaps if they were to work harmoniously, some of the problems facing the industry would be solved. 

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Crypto Guides

Implications Of Blockchain In the Global Money Transfer Industry

Introduction

Introduction

Introduction

Fund transfers within the country are cheap and fast. But, transferring money from one country to another is typically slow as well as expensive. Presently, most international fund transfers are made using the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network.

Note that SWIFT is not the one that makes money transfers. Instead, it is a network that allows communication between financial institutions for a reliable and secure transfer. This is also the reason why several banks and financial institutions sue their services.

Traditional International Fund Transfer

A transfer via SWIFT technology usually takes several days to be completed. To understand how these transfers work, let’s consider a fund transfer from a US company to a supplier in China.

1️⃣ The US company would send an order to its associated bank to make a transfer to the Chinese company.

2️⃣ Assuming it is a local bank, it would not have access to make international financial markets. So, the local bank approaches a correspondent bank in the US that acts as an intermediary.

3️⃣ The American correspondent bank would then initiate a transaction to the bank in China. If this Chinese bank is not a correspondent bank, it will approach a correspondent bank to receive its payment.

4️⃣ Once the payment is received by the Chinese correspondent bank, it will locally transfer it to the supplier’s bank.

This completes a transaction between the two countries. It can be clearly ascertained that there are many intermediaries for a single transfer. This would eat up a lot of time. And for making the transfer, certain compensation must be paid to intermediaries.

Blockchain into International Money Transfer space

A paper relating to payments using blockchain titled ‘Leading the pack of Blockchain Banking’ points out that several international financial institutions expect blockchain to have a major impact on their businesses. This paper was carried out by the IBM Institute of Business Value and the Economist Intelligence Unit, which accounted for a survey of 200 banks in 16 countries. In the outcomes, about 70% of these banks believed that blockchain technology would reduce the expense and time of international transfers.

As an initiative, several major banks from different countries joined to design a blockchain-based digital currency. Their primary aim is to create a cryptocurrency that would ease utility settlements using blockchain. The list of banks that put forth this initiative include Barclays, HSBC, Credit Suisse, Canadian Imperial Bank of Commerce, Mitsubishi UFJ Financial Group, and State Street.

Furthermore, to speed up payments, an initiative involved a tie-up between Citi and Nasdaq. Using Citiconnect for blockchain, the users will get direct access to global payments from Nasdaq’s Linq platform. This new venture will allow cross-border multicurrency payments and real-time tracking of payment transaction activity.

(Image Credits – Irish Tech News)

Blockchain here to replace the banks?

The traditional banking is powerful in its own ways. It is quite unlikely that a blockchain-based cryptocurrency will be able to completely replace the existing banking system. However, it may not be of a surprise if digital currencies are increasingly used for back-end settlement. Cheers.

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Crypto Guides

The Fascinating Applications of Smart Contracts

Introduction

Introduction

Introduction

In the previous guide, we have understood what smart contracts are and what role they play in eliminating third parties. You can find that guide here if you didn’t get to read that yet. Smart Contracts have come out as one of the interesting applications of blockchain technology but it evolved so well that it has already been applied in most of the industries. Experts believe that these smart contracts do have significant applications in many other industries. Hence, in this article, let us see their usage in different industries.

Health Care and Medical Records

One primary application of smart contracts lies in the healthcare industry. Transferring and sharing patients’ electronic medical records (EMR) should be done in the most secure way. We are not saying that the current technology is not secure at all. We are just saying that using this technology will enhance the existing security.

Smart contracts enable multi-signature approval features enabling both patients and health care providers, allowing them to share the information securely as these are sensitive data. Patients can allow their data to be sent to research organizations for various studies and can be sent micropayments to the patients for participation using the same platform. We must not forget that a lot of infrastructure and technology should be built to achieve the same.

Banking

Banking systems have undergone a lot of changes proportional to technology adoption by the people. Smart contracts can play a crucial role in the mortgages provided by banks or any non-banking financial institutions. Banks spend a lot of money to check if the property that is being mortgaged currently is already mortgaged or not. To check if the property does indeed belong to the person applying for the mortgage or not. If the documents of the property are placed in blockchain with the help of smart contracts, this can be verified in a click. This saves a lot of money to both consumers and banking, reportedly in billions.

KYC

These days we have to provide our KYC documents at various places like to open a bank account, to take a sim card, driving license, registering property to name some. If the KYC documents are stored in a blockchain, with the help of smart contracts, the right people can be given proper authority to access them. Also, if any changes required from our side, we need to make a change at one single repository instead of making changes at every entity where we have given the documents.

Supply Chain

Supply Chain is one major area that can benefit hugely using blockchain adaptability and thereby using smart contracts. There are various documents throughout the supply chain cycle which can be misplaced and tough to authenticate at and every area required. If smart contracts are used to share and verify these documents, a lot of time and money can be saved to clear the goods at national highways, significant seaports, etc. Provenance tracking can also be done, thus increasing the bar of trust among consumers.

Voting

Voting can be achieved relatively and transparently using blockchain and smart contracts. With blockchain involved, no one can tamper with the election process, and with the smart contracts, it is possible to ensure the correct person is voting instead of the duplicity of votes.

Insurance

We all know it takes time for the insurance industries to clear the claims as it takes time to check the claims for its authenticity. With the adoption of smart contracts, the respective authorities can easily fact check the claims. For example, for travel insurance, we can easily verify whether the flight is a delay or canceled, thus passing the request.

However, all these industries can actively adapt and grow using blockchain only in the ideal world where blockchain is integrated throughout all sectors and government institutions. Active engagement and development are only possible when adoption is at a high rate. The blockchain technology is still growing, and a lot of innovation and growth is yet required to use the full potential of blockchain and thereby smart contracts as well.