UK: Wary Banks Are Unlikely To Get Behind An Industry-Wide KYC Blockchain-Based Registry, Says Expert

Last Updated: 10 January 2018
Article by Tony Anderson and Luke Scanlon

ANALYSIS: Inter-bank 'know your customer' (KYC) blockchain-based registries are unlikely to get buy-in from all banks because of their wariness about relying completely on third party verifications of data.

KYC due diligence checks place enormous time and cost burdens on banks and other financial institutions, and those burdens are only growing as a result of recent updates made to EU anti-money laundering laws.

At the moment, financial institutions have to perform KYC independently, and upload the validated information and documents to their central registry where the digitalised data is stored and tagged to a unique identification number for each client.

An inter-bank KYC blockchain-based registry has the potential to remove the duplication of effort concerning KYC checks. Decentralised, centralised and hybrid blockchains are being investigated as potential solutions by banks, but most projects are largely still at proof of concept stage.

Benefits of a blockchain-based solution

An inter-bank KYC blockchain-based registry could enable encrypted updates to client details to be distributed to all banks in near real-time. This is one of the major benefits that such a system would provide.

The KYC ledger would provide a historical record of all documents shared and compliance activities undertaken for each client. This would form the evidence to be provided to the regulators.

Further important characteristics of KYC are digital identities and digital signatures. Digital identity tokens could be used to store relevant information about the customer such as addresses, account details, or any such identification information which could be used during AML/transaction monitoring, thus increasing accuracy.

However, there are already working non-blockchain-based digital signature and digital identification solutions in the market today which are used for signing contracts. It is therefore arguable whether a blockchain solution would provide any additional benefit in this respect.

There are a number of other perceived benefits of a KYC blockchain solution, however few are tried and tested.

For the consumer, there is the promise of enhanced customer experience through only having to submit documentation once, as well as increased security of their data. For banks, a cross-industry solution offers the potential to reduce operational costs as a result of not having to duplicate KYC processes. The opportunity to share fraudulent transaction details increasing network legitimacy and, for the regulator, a continuous and transparent audit trail of all transactions, are further potential benefits.

Practical questions remain unanswered

There are a number of questions yet to be answered about how an inter-bank KYC blockchain-based registry would work in practice, including, most importantly, what type of blockchain framework would be most appropriate.

One option might be to have a distributed, decentralised central KYC registry accessible and updated by all network participants. Another option might be for a distributed, centralised blockchain to operate where a single or multiple trusted authorities update the KYC data that all the network participants rely upon.

A hybrid blockchain could also be envisaged where a combination of corporate and other stakeholders update and verify KYC data with varied permissions. However, it is not entirely clear how this use case would evolve.

The limitations of third party verifications is a barrier to adoption

There are also clear limitations concerning an inter-bank KYC blockchain proposition. In practice, there would have to be consensus amongst all bank participants with regard to the standard of KYC carried out.

In reality, would Bank A rely solely on Bank B's KYC checks of a particular investor, individual or business, without verifying the results for themselves? Would Bank C rely on Bank D's historical data with complete confidence? It is unlikely in our view.

Blockchains, in their most basic form, are simply databases and the information recorded on them can only be as good as the source that verified the data in the first place, particularly with regard to distributed centralised blockchains which would probably be the most appropriate blockchain format for this KYC proposition. That means total reliance on a third party. It seems doubtful that any bank would take on this risk.

Overall, a blockchain-based KYC registry is an interesting concept still in its infancy. However, because banks are unlikely to take on the risk of relying on third party data it undermines the potential use case for a blockchain-based KYC registry proposition in the banking sector.

Charlie Clarence-Smith is a specialist in blockchain technology and regulation at Pinsent Masons, the law firm behind Out-Law.com.

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,

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions