The Identity & KYC conference in London hosted a workshop on using blockchain technology to improve know-your-customer processes earlier this week.
Led by blockchain compliance consultant Siân Jones, the workshop was attended by a group drawn from banks, financial institutions, startups and regulators.
The group discussed several challenges faced by banks and financial institutions when it comes to identity, and whether or not the blockchain can help solve these problems. The overwhelming consensus was that even though the blockchain is very promising, it has many real-world limitations around identity.
The discussion was exploratory in nature, focusing on the needs of current financial industry participants and exploring the use of potential blockchain technologies.
KYC moving beyond simple identity
The group discussed the impact on the financial industry of the trend of moving away from simply looking at government-issued identity cards, like passports and driver's licenses. Attendees looked at exploring more holistic datasets around individual identity that involve everything from purchase history to utilities connections to assess an individual’s identity.
These third-party data points already provide an important source of identification information beyond simple identification systems and are becoming increasingly popular in the financial industry and elsewhere to supplement government-provided identification data. They are also more nebulous in nature, giving a 'probability score' for how strongly the algorithm believes the individual is who she says she is.
The trend is expected to accelerate in the future, with simple identification mechanisms becoming less important for financial institutions.
In such a world, an identity on the blockchain, like a tokenized version of a driver’s license, may not be sufficient for most businesses and financial institutions. Any blockchain solution will therefore need to gather information on the individual available via third-parties, a considerably harder problem for blockchains to solve.
Where blockchains fall short
There are many challenges faced by the financial industry involving identity, and some of the key issues are hard problems to solve. The initial on-boarding process, when the issuing of identity is first conducted by a government or financial body after verifying information about the individual, still remains a challenge.
This is especially true on a global level, where a significant portion of the developing world is without any form of government-issued identification.
The reliability of any identity, whether on the blockchain or outside, is only as good as the authority issuing that identity. An identity verified and issued by the UK government, for example, would likely be considered more reliable than one issued by a bank in Somalia.
Advantages of blockchain-based identity
There are several advantages of using blockchain-based identity, especially around the quick dissemination of information about an individual in a global context.
This is true when identity needs to be revoked and reissued, especially in the event that someone's identity is stolen. For example, if a passport gets stolen, the issuing country might replace it, but it takes much longer for a financial institution in another country to know about the status of this identity revocation. Blockchain allows this process to be quick and efficient.
In addition, blockchain-based identity systems have the possibility of selectively revealing information about an individual’s identity. This could help prevent identity theft and enhance end-user privacy.
There could also be efficiency gains by larger institutions around issuing blockchain identities, especially because a lot of verification processes today are repetitive.
Although not a current concern to the nascent Internet of Things industry, several institutions are looking into how digital identity will play out when identity is not restricted to individuals and legally defined entities but also includes physical things.
A blockchain seems like an efficient solution to handle such large-scale identities that need to be shared among multiple stakeholders.
Although many financial institutions are exploring blockchain technology for identity solutions, most of the rules and regulations around KYC and identity for regulated financial companies revolve around government-issued identity as the preliminary requirement. Therefore, the use of blockchain for identity will need to start with a government body deciding that it would issue some form of identity on the blockchain.
There are many unsolved problems around this, from privacy to access. For example, even though an identity document like a passport is issued to the individual, it isn’t owned by the individual in a legal sense.
It is unclear how the identity data on a blockchain will be owned — whether the individual or the identity issuing body will ultimately own the identity and data around it.
As Jones put it:
"The fundamental challenge in identity is the intents of various participants are not aligned. Governments, businesses and individuals have conflicting interests."