Blockchain-based KYC and AML Compliance | BlockChain Startup Ideas

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This 1001 Startup Idea from Yostartups is to streamline the current Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance procedures by using Blockchain-based KYC and AML Compliance Platform to verify and validate counterparty information and identities to drive savings for the financial Industry.

Market Definition for – Blockchain-based KYC and AML Compliance

World Bank estimates that the volume of money laundered annually is between $2-$3.5 trillion annually which is around 3%-5% of the global GDP. All this laundered money originates from illegitimate sources like Drug Trafficking, Financial Frauds, etc. which are disguised and shown to be arising from legitimate activities. To counter Money Laundering operations, the regulators are consistently formulating and updating guidelines for in-house compliance against money laundering. Despite all the efforts by the regulators, third-party data suggests that less than 1 % of money laundering is detected and banks are penalized for non-compliance. The banks are incurring around $18bn in expenses annually in AML compliance costs including penalties. So introducing a blockchain consortium of regulators which can operate on a shared ledger for compliance can detect and track money laundering activities. Also, a shared distributed ledger of validated customer information can reduce time and costs incurred in KYC boarding.

The world realizes the need for harmonization and sharing of cross-border financial data to be used for AML and KYC compliances. The recent TFFT agreement between US and EU for transfer of economic data with SWIFT being the designated provider of data is a step in the direction of things to come.

Competitor Analysis for  – Blockchain-based KYC and AML Compliance

Trunomi: solving KYC by connecting customers to financial institutions by managing the consent to share customer data and making it a customer-centric secure data sharing platform.

Bitnation: a governance 2.0 platform that leveraging blockchain technology to provide similar services that governments provide, making them decentralized without borders. It has started identification solutions like BlockChain Passport and Marriage Certificate.

R3 is an industry consortium of banks and technology companies created to accelerate adoption of blockchain among financial institutions by co-developing technology and standards to be used by members of the consortia. R3 has also tied up with many tech groups outside of the consortia to check for the platform’s compatibility with other blockchain platforms.

Pain Point and Target Audience for – Blockchain-based KYC and AML Compliance

Distributed Ledger Technology (DLT) ledgers can also streamline KYC procedures. A research published by Thomson Reuters in 2016, on KYC and (Client Due Diligence) CDD in banks (Asia Pacific region) indicated that the average time to onboard a client was 26 days and costs associated with onboarding increased over 18% over the last one year. As another challenge, 39% of the financial institutions surveyed had the shortage of personnel who could complete KYC/CDD formalities. The research also revealed that frequent and ad-hoc requests for information created a conflict in the bank-client relationships. Major banks were spending about 20% of their operating expenses on risk and regulatory compliances. A global survey conducted by Thomson Reuters in 2016 revealed that banks are paying about $60mn in KYC and related compliance processes annually.

As per a report published by Goldman Sachs in 2016, there is a lot of duplication involved in conducting KYC and CDD of a prospective client, as every new account has to be verified for compliance whereas validated data is already present in the database of another bank holding account of the same client. This duplication of effort sometimes can cost banks $15k-$50k per client.

All these factors require the banks to hire and deploy additional workforce as all the data has to be verified manually every time a financial transaction takes place. The onboarding and monitoring constitute about 80% costs of the AML budget annually

Value proposition for – Blockchain-based KYC and AML Compliance

Goldman Sachs in 2016 estimated that blockchain adoption in financial institutions could result in potential savings of $3-$5bn on account of reduced headcount for compliance, tech costs and penalties resulting from AML regulations. These figures arrive on the assumption that use of blockchain could result in overall reduced headcount for KYC compliance. As all the records will be on a centrally distributed ledger, there will be no need for duplication of efforts for conducting KYC/CCD again on verified customers

As all the transactions monitored on a blockchain are with verified credentials, the cost of monitoring transactions manually would reduce significantly. As a result of stricter adherence to compliance, the AML penalties could decrease by at least 10-40% annually.

Business Model for – Blockchain-based KYC and AML Compliance

The company will have to build its online platform on one of the existing blockchain platforms like Ethereum, Bitcoin or Hyperledger, and ensure that this platform is base platform agnostic for operations. Once the platform is ready, the platform subscriptions can be sold on a SaaS-based model to prospective customers. The offering can also be clubbed with Pay as you GO Model or Pay per active user models.

Way to Market for  – Blockchain-based KYC and AML Compliance

The proposed start-up will have to tie up with one of the major banks who would be interested in adopting blockchain based solutions to simplify their KYC/CDD operations further. This bank can also help the start-up develop and evolve guidelines which can be used by similar financial institutions. As the platform is designed and optimised further, it can start onboarding new businesses.

Milestones for – Blockchain-based KYC and AML Compliance

In the first year of operations, the start-up will have to develop a robust platform which is interoperable among all the other widely used blockchains. In the second phase, the platform should be tested for stress, cross-platform compatibility, and security by partner technology firms involved in the pilot phase.

Once the platform is ready for launch, the company will have to start selling the product on a SaaS-based model.

Investment Needed for Prototyping of  – Blockchain-based KYC and AML Compliance

For the prototype, the start-up can raise the required investment typically ranging from $50,000 to $100,000 from start-up accelerators like The Synechron Blockchain Accelerator for KYC, ZhongAn Technology, Bank of England FinTech Accelerator. The start-up can also leverage the existing software capabilities of these accelerators to scale up quickly.

Team Capability for  – Blockchain-based KYC and AML Compliance

The proposed team will be a mix of fintech and technology experts on blockchain development. The expert on finance should have a background in risk compliance with in-depth knowledge of AML, FinCEN, OFAC, CIP, KYC, and CFT. The blockchain developer should have experience with blockchain, cryptography, and data-science preferably in finance or banking domain.

Investors/Expert Take for  – Blockchain-based KYC and AML Compliance

The cases of data-breach, illegal hacking, identity theft and fraud are increasing, the simple premise of blockchain that is security, efficiency and being tamper-proof makes it a compelling case for all the industries looking for solutions tackling fraud and authentication. While the adoption will be slow due to the regulatory reforms required by the authorities for implementation of blockchain based solutions to replace the current legacy solutions.

However, the silver lining is, a global benchmarking study was done by the University of Cambridge in 2017, about 30% of all uses of Distributed Ledge Technology are from Banking and Financial Industries with specific attention to non-monetary uses like supply-chain, IP, etc. Currently, banks form the most significant users of DLT technology.


This 1001 startup idea article is from Yostartups, YoStartups is a Pre Accelerator and it empowers entrepreneurs to propel their business ideas into successful ventures. Yostartups’ core mission is to take the message of entrepreneurship to 1 billion people globally by 2020.

In case you are looking at scaling or launching a venture on similar lines, you can apply for our virtual acceleration program Excelrate on our website, Yostartups.com, Yostartups’ Excelrate program will help you in streamlining and structuring your startup idea. We have limited scholarships and discount packs for deserving startups, depending on the strength of your application, you may qualify for a discount.

 

*Any information given in the article does not constitute any warranty of marketability or fitness for a particular business idea for any market or industry segment. It is the readers’ sole responsibility to further research and assess the market opportunity.
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