How to improve identity verification with KYC and blockchain

Today's businesses (including traditional ones) face a common challenge in the cyber security and technology ecosystem: verifying the identity of their customers in a secure, efficient and compliant manner. In this context, the KYC (Know Your Customer) process becomes essential, not only to comply with legal regulations, but also to prevent fraud and guarantee reliable operations without jeopardising the prestige and reputation of companies.

It is not an easy task, but the good news is that emerging technologies such as blockchain allow a qualitative leap in how this verification is carried out, facilitating more streamlined, secure and sustainable processes. To this end, there are already specialised companies with teams of professionals dedicated to advising and guiding the process of adapting to these new technologies.

It can be defined as the process by which a company verifies a person's identity before allowing access to its services. This may involve submitting official documents, completing forms and conducting third party validations.

This process is key to preventing fraud, avoiding identity theft and protecting both the company and the user from crimes such as money laundering or the financing of terrorism, i.e., it enables the creation of trustworthy ecosystems, guaranteeing that each user is who they say they are.

However, in addition to being good practice, KYC is a legal requirement in sectors such as banking, telecommunications, healthcare and e-commerce. There are regulations for this, such as the European Regulation eIDAS 2.0, the anti-money laundering directives or the GDPR that establish the obligation to verify the identity of users and protect their personal data.

Implementing a robust KYC standard not only avoids penalties, but also builds trust, because both users and customers feel more secure knowing that their data is protected and that the company meets high security standards, which also contributes to a good reputation of the company.

The usual process for verifying a person's identity often involves lengthy forms, long waiting times for manual validations and, in many cases, unnecessary duplication of data each time a new service is accessed. This generates frustration among users, even causing them not to complete a transaction, negatively affecting customer conversion, especially in sectors with high digital competition.

For businesses, however, traditional KYC means high operational costs, from the collection and validation of documents to the secure storage of sensitive data. Added to this is the risk of human error, regulatory breaches or data leaks that can compromise corporate reputation.

As companies operate in international markets, traditional KYC processes do not scale easily. Lack of interoperability between systems, regulatory differences between countries and a lack of shared standards make global identity verification difficult.

This technology offers a new way of managing identities in the ecosystem, with significant benefits for security, efficiency and user experience.

Thanks to the blockchain structure, each identity record is immutable (it cannot be modified once created) and traceable, which guarantees its authenticity. This makes fraud more difficult and provides an additional layer of trust for both the company and the user. The steps for registration are as follows:

1. Creation of the digital profile:
   The user generates a profile on a decentralised blockchain-based identity system, where they are assigned a unique identifier (DID) that represents their digital identity.
2. Verification and issuance of credentials:
   An authorised entity (e.g., a KYC company or a financial institution) verifies the user's information. Once validated, it issues a verifiable credential that is given to the user. The blockchain does not record the full credential, but only the cryptographic evidence necessary for third parties to verify its authenticity without exposing personal data.
3. User control of data:
   The user retains full control of their personal data. They can manage what information they share, with whom and for how long, without giving full access to their identity.
4. Re-use of verified credentials:
   When another entity requires verification, it can consult the previously issued credential and validate it on the blockchain, without the user having to go through a new KYC process. This reduces friction, costs and risks associated with repeated handling of sensitive data.
   

With blockchain, it is possible to verify identity in a decentralised way, without the need for a single entity to store or process all the data. This allows for almost instant verification, reduces the need for intermediaries and streamlines onboarding and access to services.

This new approach gives way to eKYC (electronic Know Your Customer), based on reusable digital identity wallets, where users have control over their data and can share only the necessary information with each service, improving privacy and reducing the risk of leaks.

You can read more on the official ISBE website.