In one of our latest blog posts, we explored the synergies between open banking and the crypto space and how open banking can facilitate blockchain technology to go mainstream. The article’s main focus was on crypto exchanges and payments and how open banking can make the overall experience much smoother.
Today, we will explore a different relationship between the two, emphasising the benefits of OB in the crypto KYC process.
What can open banking offer to KYC on the blockchain?
U.S. financial services firms spent $25.3 billion per year on AML compliance, according to a LexisNexis Risk Solutions survey. The cost of traditional KYC and AML processes is not only the reason for customer onboarding friction but a true burden on the financial resources of companies. Open banking and blockchain can affect onboarding speed, costs, and much more.
Accessible information by everyone at all times
Blockchain technology and open banking share the same ideology: easiest access to data and informational transparency. Open banking powers this idea through APIs, whereas blockchain does it through Distributed Ledger Technology (DLT) – a protocol that eliminates the need for a central authority to keep a check against manipulation.
So, when blockchain users want to sign up and use a decentralised exchange (DEX) to execute direct peer-to-peer cryptocurrency transactions, these matching ideologies come into play. There is no need for KYC confirmation by a bank or a third party. The user uploads their information on the blockchain and is visible to everyone. The individual participants (banks, government agencies, companies) are then responsible for collecting the personal data stored on the decentralised network.
Security is enhanced because the user logs in directly with their bank, meaning authentication is built in from the ground up. That’s not only beneficial to the end-user but to regulators too. Depending on the geography and jurisdiction they are operating in, crypto exchanges need to comply with the corresponding AML and KYC laws. By using open banking, exchanges can prove the source of funds on their platform.
What’s the ideal scenario for open banking and crypto KYC?
In an ideal world, we would have a decentralised platform where APIs are universal. Smart contracts will guarantee that ecosystem participants follow protocol. Users will mainly benefit by controlling their own data and approving information to be shared with financial institutions that can personalise services. In this model, the customer is in complete control of all of their data efficiently, having the ability to grant and revoke access at any time.
Just take Binance as an example. Last year, the world’s largest cryptocurrency exchange updated its KYC policies for “better user protection and risk management protocols, especially as crypto becomes more mainstream and crypto regulations around the world advance further.”
Being a leader in the space, they are paving the way for other exchanges and startups. Open banking collects consumer data by collaborating with banks and obtaining information from tax authorities in different countries. Taking that into consideration, blockchain exchanges can leverage the network of connections and information and validate critical data such as:
- recipient’s name
- bank account number
The most crucial element in this process is that the validation process can automate the KYC process, making young crypto startups time and money efficient.
Can open banking offer more than just KYC?
How do you know a new technology is trailblazing? It does more than you initially thought it would. Open banking can verify consumers’ identities, but it also possesses the power to authorise a crypto payment or fund withdrawal without the traditional banking process. Here are a few of the hurdles they will eliminate:
- Waiting 1-2 business days for wire transfers to through
- Re-filling personal details such as name, address, contact, and account number during wire transfers
- No need for live chat
Once a crypto exchange connects its open banking APIs, it will be able to automatically detect where the money comes from, when it arrives in the bank account, and when it needs to send the money back to the customers. By unlocking this part of the process, crypto exchanges and startups will elevate the overall consumer experience as a whole.
Breaking down borders
Currently, a crypto company based in Europe that wants to kick-start operations in Latin America would have to face an ordeal of challenges:
- different regulatory systems
- incompatible banking systems
What’s the plug that can globalise crypto businesses? Open banking. As mentioned before, open banking technology builds a knowledge base of information around regulatory environments in various countries, creating deconstructed data silos. Crypto startups can overcome country-specific challenges by using APIs.