All financial institutions are required to perform “know your customer” (KYC) checks to comply with regulations and tackle risk contagion throughout the holding chain (a chain of “custody” service providers). This is most pertinent to investor onboarding, where due diligence processes require collecting and validating a client’s information, which in turn generates numerous challenges for the onboarding and onboarded parties:

• Redundant processes across individual holding chain participants
• Data inconsistencies across individual holding chain participants
• Compliance difficulties with evolving investor data
• Delays for onboarded customers

In practice, opening an account at a custodian may take weeks due to onboarding requirements and KYC due diligence. KYC processes usually require gathering information manually from separate sources and systems, information analysis and validation, and may result in duplicative efforts which drive up operational costs and risk compliance across evolving customer data regulations.

It is also important to note that collected data is evolving over time, which re-initiates the same KYC steps on the updated data.

Distributed Ledger Technology can be leveraged to solve for all of these challenges

By its very definition, distributed ledger technology (DLT) supports a decentralized model of record-keeping. As such, DLT and a smart contract solution is particularly well-adapted for setting up and maintaining a shared record of information through workflows involving different stakeholders. Furthermore, the immutable nature of DLT, along with its ability to create a secure, yet logically shared environment, in open or private networks, creates a record-keeping system where multiple parties have real-time access to permissioned data and can engage simultaneously on processes.

Digital Asset partnered with IntellectEU on a DAML-based KYC application deployed on DLT.

IntellectEU created a DAML-based KYC application that can be implemented across a capital market, where data is uploaded to a DLT platform, integrated with (or built as an extension of) a legal entity identity (LEI) register and a personal identity register. The KYC/due diligence information would be stored, validated, and maintained on a shared record according to defined workflows involving both the onboarded and onboarding parties and enforced via DAML smart contracts. Here is how the solution would function:

First, DAML assigns actions to onboarded/onboarding parties such as documentation submission requirements prior to market participation. The DAML smart contract shares that documentation with the permissioned parties on a distributed ledger in real-time. The DLT platform ensures data immutability so parties only have to submit documentation once. Ad-hoc requests for documentation can also be executed using DAML which updates the ledger without losing previous documentation/records from the initial onboarding process.

Once a KYC/due diligence process has been performed by one provider in the capital market, the shared record on the DLT platform can be made accessible to any other capital market provider willing to engage with the same entity. A new onboarding party will run its own KYC process from the shared record and will confirm, correct, or add information to the shared record. Financial services providers/intermediaries must still perform their own KYC checks when onboarding new clients, but the solution drastically accelerates the process.  

It’s worth noting, that access to the shared record is to be done under strict consent, provided by the onboarded company through the smart contract. Further, as each market, service type, or financial product type has its own specificities and risks, the solution enables different standardized, but customizable data templates and workflows.

A DLT KYC/due diligence solution is a founding step to enable the set-up of beneficial ownership registers and to create a fluid, but risk-controlled access to a wide variety of markets. It is also a key part of a wider LEI implementation. 

The advantages that a DLT-with-DAML KYC solution generates, in terms of cost reduction and customer experience for both the onboarding and onboarded organizations, should push for its capital-market-wide adoption.