Decentralisation v compliance: How Centrifuge is helping improve processes for onboarding and KYC

Decentralisation and in particular DeFi is a very compelling idea, in part because it challenges some of the financial power structures that currently exist, whereby capital is created, managed and provided by a monopoly of institutions in a way that benefits the few over the many.

Although I am ideologically in support of the premise, I recognise the practical reality of trying to launch an enterprise in a centralised ecosystem dominated by governments, central banks and their off-shoots. These agents still control the rules of the game. Playing outside of those rules or creating new ones might appease the revolutionary among us, but will prove short lived under current constraints. In this context, while DeFi can aspire to rebuild even in fundamental ways the existing financial highway, it will likely need to do so by knowing the limitations that the system currently enforces. This doesn’t mean that new innovative projects and concepts can’t emerge or have meaningful impact in how ‘business’ is waged.

In the case of Centrifuge, it is walking a path in the present with a firm vision of the future, providing a bridge between real and digital assets. To execute that, it needs to deliver an onboarding process that verifies the parties interested in participating.

What is KYC and why it’s important

Know your customer (KYC) is probably something that we’re intimately familiar with through our experience of registering an account with an institution, platform or other financial service. It is a mandatory process of due diligence to validate and verify individuals or businesses as suitable and not engaging in illegal or nefarious activities. It helps credit providers and other lending platforms assess a client’s credit worthiness, and evaluate the risk and probability of insolvency. At the macro level, it can help prevent reputation-damaging headlines such as organised crime, money laundering, and funding of terrorism.

When banks/institutions don’t follow KYC and affiliated protocols, they leave themselves open to significant regulatory penalties and potentially irreparable harm to their brand.

Problems with KYC processes

Our direct experience with KYC affirms the process is often time consuming, tedious, excessively complicated and onerous, and costly and inefficient for everyone involved. Studies have shown that onboarding can range from anywhere between 30-50 days.

These problems are compounded by the absence of a global standard for KYC regulation. In 2017, a survey conducted by Thomson Reuters found that respondents on average engagement with 10 global banking corporations, each one placing different demands throughout the KYC screening process. This experience discourages clients/investors from continuing with their application or even search for less demanding environments in which to apply.

Compliance costs have also continued to increase due to KYC requirements imposed on institutions by their regulators. In the same survey, TR found that in 2017, the average spend by institutions in their compliance divisions increased in total by $8 million, while the number of staff required increased by an average of 68. Despite the increases, many institutions reported having insufficient resources to ensure compliance with regulatory requirements.

The overall inefficiency of the process is also demonstrated by customers having to speak to multiple representatives from the institution, often on multiple occasions. Up to 30 per cent of customers in the TR survey for example also confirmed not notifying banks etc of changes in their circumstances, which lead to even more cumbersome record keeping and auditing outcomes.

How blockchain is helping with KYC processes

Blockchains as public and distributed ledgers that offer a verifiable source of authenticity can help institutions/regulators clearly identify customers, with details such as source of funds, business interests, history of transactions etc.

They can also allow entities to locate and monitor the progress of a customer application in real time.

Blockchains can reduce other pitfalls, such as high risk of human error, double-handling of information, and other data quality inconsistencies.

Centrifuge works with Securitize to improve onboarding and KYC processes

Centrifuge, as an emerging player in the onboarding and conversion of real assets into DeFI tokens, partnered up with Securitize to provide a more robust and efficient KYC process, as part of Tinlakev3. (you can see Tjure07’s great post on the steps involved [here]).(Investing in Tinlake revolving pools - Insights from a first-time investor).

A core aim of Securitize, which was launched in 2017 and has since built a growing base of blockchain clients, is to create a more streamlined and less confusing onboarding process for participants.

This is achieved by:

  • Faster and unique verification - that allows for investors to complete the verification process in minutes and re-use their identities to ensure consistency of records

  • Connecting to multiple platforms to integrate the same KYC verification process

  • Ongoing monitoring to ensure investors are are not flagged by domestic and foreign sanction watchlists for suspicious activity

  • Enabling a single-sign in account that is secure and verified

  • Preserving document integrity - ongoing monitoring and documentation review that can help automate updates of client documents (i.e. uploading a new government issued ID if old one has expired)

Centrifuge recognises the advantages of using this type of onboarding, because it allows users of its Tinlake Pools to register relatively easily and one-time and then subscribe to any of their other offerings. At the same time, it adds legitimacy to the project in the eyes of regulators and allows the DeFI space overall to gain credibility and continue to grow, despite what critics legitimately cite as the widespread availability of questionable or poorly designed projects in the space of digitising assets.

More specifically for Centrifuge, it helps the pools accessible on the Tinlake platform to stay in regulatory compliance, which will help build trust in the model for actual parties interacting, while also attracting potential investors and asset originators down the track who see the value proposition. More broadly, it solidifies Centrifuge as a serious player in the DeFi space and one that is leveraging its experience and knowledge of supply chain finance to convey its message and scale.

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This article is so timely with the SEC taking on XRP. I really appreciate that Centrifuge is using Securitize to onboard new investors. I feel more and more confident that Centrifuge will work within the regulatory world in a way to give credibility to the block chain. I think anyone who sees this should know that Centrifuge is a ‘blue chip’ crypto. Centrifuge has a very promising future.

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