Can I Identify Myself as Digital, Please?

29 Apr 2024

Know Your Customer (KYC) and Digital Identities technologies are two important elements in the process of customers’ verification. KYC is a process that companies and organizations use to verify their customers, ensure compliance with governmental regulations (like Anti Money-Laundering) and prevent cyber crimes like hacks and fraud. The existing popular KYC mechanisms often include checking physical documents, like government-issued passports, IDs,and utility bills, to confirm a customer’'s identity.

Even though the current approach is well-tested and established, it has many different downsides:

  1. Cost-efficiency. According to KPMG, the biggest banks in the industry spend up to $500 million per year to improve and support their KYC and AML procedures. Maintaining KYC and AML procedures includes data collection, digitizing government-issued documents, which requires a lot of human effort. All this brings the costs of KYC and AML to incredibly high numbers.
  2. Reliability. Users’ data must be stored somewhere, and in many cases, it’s not reliable enough. Just in January 2024, a leak in Binance lead to users’ KYC data being sold on the dark web. Any centralized data storage will always be under the risk of being hacked, since you only have to breach one exact storage to gain access to sensitive data.

Is there an alternative? There is! A much more modern way to identify and store users’ documents is called Digital Identities, which uses cryptographic techniques to collect, store, and analyze sensitive data. Digital Identities technology includes electronic credentials, biometrics, and any other digital traits that can be helpful for identifying customers online. On-chain Digital Identities, meaning that the data collection and storage is happening directly on the blockchain, are significantly cheaper and more secure for companies because of the blockchain's incredibly low transaction fees and very high security level.

The Current Use of Digital Identities

Right now, Digital Identities are receiving more and more popularity as a modern solution to the problems of traditional KYC technologies. Many fields, including finance, healthcare, and e-commerce, are considering the integration of Digital Identities to improve and optimize user verification and enhance security. One very interesting use case of digital identities is DoorDash. When ordering alcohol, to verify the age of the customer, instead of manually checking the physical document every time, the customer uploads the digital version of their document, and the courier simply refers to a blurred version of the ID with only the photo and birth date. This is a perfect example of keeping the balance between privacy, and compliance.

We see the trend of decentralization getting stronger in the data security sphere, and the KYC vs Digital Identities debate will definitely impact the future of how we manage our data.

Reliability of Digital Identities

One of the biggest differences between KYC and Digital Identities is the approach to storing the data. With KYC, the data is stored in a centralized database, meaning that the company collects the data from all users, and then stores it on one server, or in one cloud. With Digital Identities, it's a whole other story. The user's data is stored on the blockchain, all in different blocks. It means that a potential hacker will have to hack hundreds of blocks instead of breaching one database. Because of blockchain's inner security, digital identities are making sensitive data much more secure and hacks-proof. Moreover, users have much more control over their own data. As in the DoorDash example, the user only discloses what they want to (the age and the picture, blurring out everything else).

Where’s the catch?

Digitizing of any kind always means more potential control from the government or service providers. When everyone used cash, it was incredibly hard to track one’s transactions and purchases. When everyone used libraries instead of the internet, it was impossible to check the information one was looking for. As we digitize our documents, a possibility for government pressure, or fraud from digitizing providers occurs. Digital Identities can let autocracies control the population even more, by gaining 24/7 access to the digital versions of people’s documents. However, we firmly believe that this danger can’t stop progress. Even though the technology can be used for harm, it will still improve the lives of millions both customers and companies.

What’s next

The Digital Identities technology has gigantic potential, and has the opportunity to revolutionize the non-financial parts of our lives as well. For example, travel with digital identities can make us finally forget about visas, as all information, including our past travels, data, permits, and visas will all be stored on blockchain.

Moreover, digital identities have the potential to revolutionize financial services by powering secure online transactions without the need for complicated paperwork in loan applications and financial verification.

In the job market, they could make the  hiring processes much simpler, allowing for seamless online job applications and background checks.

While the prospect of implementing digital identities brings exciting opportunities, it's essential to address associated challenges such as privacy considerations and the implementation of robust cybersecurity measures.