Cryptocurrencies and Anonymity
One of the founding principles of Bitcoin was that anonymity was an integral part of the system. Bitcoin prided itself on being separated from governments, not allowing any bank or interested party to have access to your money, and seeking a true peer to peer economy. Since it’s inception it became very clear that people were willing to take advantage of its privacy, most notably when the ‘dark web’ became plagued with all sorts of contraband from illegal drugs to firearms − all accepting Bitcoin as payment. Anyone who has been in the crypto world long enough or read the evening news knows about the infamous Silk Road; a website built for Bitcoin users to buy and sell drugs. If anonymity was key to cryptocurrency, then why now, in 2018, will many cryptocurrencies seek a “Know Your Customer” (KYC) model as opposed to privacy and anonymity? The answer is quite simple.
Blockchain As A Service
As we move into what I have been calling the “second generation of cryptocurrencies,” we are seeing considerably more coins that are “blockchain as a service”. What this means is that these new blockchain projects are seeking to solve real world business problems, and in the real world, there is somewhat of a necessity for your identity to be known in order for things to work. For instance, how are you going to get airline tickets, rent a car, secure a mortgage, open an online bank account, or register for a new drivers license without giving up any information? In the current social and economic climate this is not going to happen and is why KYC blockchain projects are going to boom this year.
As we delve further into the digital age where computers rule the world around us, secure identity confirmation will become a mainstay and blockchain will be the ideal system to run it on. Blockchain KYC systems will become your single-step login for all your favorite e-commerce sites, no longer will you need to show your ID to the doorman at the bar, airlines will be able to confirm your identity from the moment you purchase your ticket to the time you board the plane, when reserving a rental car the clerk will scan your QR code and have all the information they need. Ideally, KYC systems will replace the need to fill out repetitive information, name, address, number, and so forth.
Why We Need KYC Systems
Online fraud and identity theft are some of the most detrimental and widespread scams out there. According to CNBC, consumers experienced $16 billion in lost funds due to fraudulent activity in 2016. They also go on to say that fraudulent online transactions, or situations where the physical credit card is not required to complete the purchase, rose 40% from the prior year, stolen login information increased 31% and fraudulent account creation rose 20%. It is for these reasons and more that blockchain backed ‘know your customer’ logins could end up saving consumers and businesses billions annually.
Identity theft is also experiencing an all time high as of 2016. A USA Today article said that “An estimated 15.4 million consumers were hit with some kind of ID theft last year, up from 13.1 million the year before.” When you consider the frequency of data breaches such as the recent Equifax data breach and how in 2013, the health care industry experienced more data breaches than it ever had before, accounting for 44% of all breaches, you may start to be more concerned with how your information is handled, stored, and disseminated.
While your information may have already been made public by these breaches, a KYC verification system would still be beneficial. Consider the situation where someone has stolen your social security number and just tried to open a bank account at a bank that has implemented KYC blockchain technology. Hypothetically, what could happen here is the bank will attempt to create the account, their KYC verification system will ping your phone with an “Authorize” request saying someone has used your social security number. The only person capable of authorizing this request is you because you hold your private key. It is almost as if it could act as a form of 2-factor authentication for usage outside of logging in to a website.
How Does It All Work?
So how would blockchain based know your customer systems work? This video from Civic.com, a KYC blockchain platform, showcasing their “Secure Identity Platform” gives a good overview of real use case scenarios.
Users would begin by uploading their identification documents to the system. Information such as government IDs, bank accounts, credit cards, login information, etc. This information all gets stored securely on the blockchain. When you visit an establishment or website that accepts the KYC verification you simply scan your phone and authorize the information to be released. Additionally, only relevant information gets confirmed by the third party. No need to worry about your favorite bar having access to your bank accounts, too.
Another not-so-often considered use case for KYC coins is actually as an augmentation to other blockchain projects. Projects such as Agrello (reivew here) or Elixir (review here). Agrello, in short, is a blockchain project seeking to provide legally binding smart contracts. In order to have legally binding contracts you certainly will need some kind of user authentication. Elixir, on the other hand, is a lending platform. Their long–term goal is to create a collateral system whereby loans will be legal contracts, another situation where KYC is necessary.
A few KYC projects I have come across during my research are Civic, Pillar Project, Persona, SelfKey, and KYC.Legal (currently ICO). Most of these projects are still in their infancy, the largest one in the list, Civic, has a roughly $350 million market cap at the time of this writing. Each one features their own version of KYC technology, some a little more in depth and far reaching than others, but nonetheless I believe would provide at a minimum the same level of basic verification.
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