The Blockchain of 2020

Early in the pandemic, the FT, in response to the UK regulator sanctioning a digital KYC process, highlighted that “checking new client identities remotely amid the coronavirus lockdown makes financial firms more vulnerable to attempted money laundering, and regulatory guidance to accept ‘selfies’ and emailed documents amounts to ‘a fraudster’s charter’.” Yet, some of the industry have been advocating for a particular solution utilizing Digital ID systems, which according to the FATF is defined as “electronic means to assert and prove a person’s official identity online (digital) and/or in-person environments at various assurance levels.” In fact, back in March, FATF released its guidance on digital ID systems and outlined the ways in which financial institutions can prepare for the inevitable changes in our global financial system.

In a piece for ACAMS Today, Stuart Davis noted that “digital identity” replaced blockchain to become the “new tech-based solution to revolutionize compliance functions from anti-money laundering (AML) to audit.”

So, how can financial institutions benefit from a system of digital IDs?

The benefits of a digital ID system to a financial institution, according to Davis, include “increasing revenue, elevating the customer experience and enhancing regulatory adherence,” which was also corroborated by a 2019 McKinsey study. In fact, McKinsey notes that, in addition to increased financial inclusion, digital ID systems have the potential to reduce fraud, a concern highlighted by the FT, and one which has proliferated in these uncertain times.

This past week, Sigma’s COO, Gabrielle Haddad, presented at the Finovate Fall Digital conference on a panel focused on the evolution of digital identity in the context of crime prevention and swifter onboarding.   All of the panelists, which included speakers from Stripe, One World Identity and others, agreed that a 360 degree assessment of customers that is possible with a digital ID system would create a better customer experience and improve an institution’s ability to respond to increasing regulatory demands in AML and KYC.   The panelists discussed the advancements in technology that are driving improvements in digital IDs which range from biometrics to machine learning to blockchain.  Yet, as Gabrielle highlighted, although technology is already being leveraged today to create digital IDs on individuals, the adoption of technology to create corporate digital IDs is lagging across the industry.  

The challenges in creating digital corporate IDs include inconsistencies in data availability across jurisdictions and the fact that key corporate data (such as corporate registries) are not structured in a uniform manner company to company.  Furthermore, companies do not have unique identifiers such as fingerprints that make mapping data on an individual to a digital ID possible.  Despite these challenges, it is possible today to leverage machine learning technology, like we do at Sigma, to make connections between different datasets and to normalize data across companies.

The consensus on the panel was clear:  the institutions that are going to get ahead in terms of dazzling their customers with a better customer experience, improving customer retention and driving revenue are those that will use technology to make use of the massive amount of data that exists to better understand their customers.  And that’s true for individuals as well as corporate customers.  

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