Canada: KYC And AML Compliance - Can Blockchains Help?

Canadian legislation, more specifically the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the "PCMLTFA"), imposes several obligations, also known as anti-money laundering ("AML") rules, on reporting entities with the purpose of combatting the laundering of proceeds of crime and the financing of terrorist activities. A common perception, rightly or wrongly, is that cryptocurrencies are a vehicle for money laundering. Perhaps the question we should be asking with the growing adoption of blockchain technology is what are some of the opportunities that can be seized upon by reporting entities with regards to such obligations?

The Current Situation

In 2014, changes to the PCMLTFA were introduced to allow for the making of regulations respecting those who are "dealing in virtual currencies". These regulations, which have yet to be proposed, will subject dealers in virtual currencies to the registration, reporting, record keeping and identity verification requirements under the PCMLTFA. However, in absence of such regulations, virtual currency dealers are not yet subject to these rules, in particular the know your client ('KYC") obligations.

The KYC process under the PCMLTFA can take anywhere from 30 to 50 days to be completed to a satisfactory level1 and it is estimated that the costs for AML compliance can be up to 18 billion dollars annually2 for the banking industry.  Blockchain technology may turn out to be a time and cost efficient solution to compliance.

Enter Blockchain Technology

Blockchain technology, the technology behind several popular cryptocurrencies such as Bitcoins, is a ledger that is public, digitalized and decentralized and is shared throughout a peer-to-peer network. Transactions are validated through a consensus mechanism involving participants of the network (some of whom are rewarded with cryptocurrencies) as well as cryptography, which creates identical ledgers in multiple computers and makes the ledgers highly difficult to corrupt.

The risks associated with the use of cryptocurrencies and the anonymity of users on blockchain platforms have often been the subject of concern and criticism.

Opportunities to Seize

Although the risks mentioned above do exist, blockchain technology, if embraced by reporting entities, can potentially be an asset to ensure compliance with KYC and AML rules. Certain service providers have started to come up with innovative ways to offer such client identification services.

Currently, the KYC process is largely handled directly by reporting entities and their service providers. With blockchain technology, however, client identification can be substantially simplified at account opening and can result in significant cost efficiencies. The technology, for example, can help digitize and automate the client on-boarding process, which would substantially reduce the duplication of work done across firms without compromising security. A centralized blockchain ledger could also offer digital identities to clients which would provide an accurate real-time update to all institutions authorized to use the "KYC ledger" for the purposes of ascertaining client identity. Through the "KYC ledger", for example, only the first reporting entity that would deal with the client would be required to perform the identification verification process, while all subsequent users (whether a bank, a casino or money service business) could simply rely upon the secure and immutable nature of the ledger to confirm that the identification has been completed.

Similarly, considerable advantages can be identified for AML compliance. For example, blockchain technology would allow for improved data management efficiency, reliable recordkeeping and increased transparency of transactions, which are just some of the benefits for reporting entities that are seeking to ensure adherence to AML rules3. These characteristics would make it easier for those entities, and even regulatory agencies like FINTRAC, to better identify and trace fraudulent transactions.


Whether FinTech companies will be able to ultimately employ blockchain technology in order to better achieve compliance with KYC and AML requirements is an interesting question. One of the challenges that must be overcome is the perception that the current rules and guidelines for KYC and client identification are not entirely "friendly" to new technologies, including, for example, facial or fingerprint recognition, which many view as just as or even more reliable than traditional methods.  Gowling WLG's Blockchain & Smart Contracts Group will be closely following the evolving regulatory space of blockchains and help you take advantage of new opportunities.


1 Elliott Holley, "Cost of KYC too high says Swiss start up" (January 20, 2014), Banking Technology, online: .

2 Goldman Sachs, "Profiles in Innovation – Blockchain – Putting Theory into Practice" (2016) Equity Research 71.

3 Ibid at 71-77.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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