Securing DLT-based KYC via randomised audits

Abstract

Know Your Customer (KYC) is a costly and heavily regulated process that financial institutions are legally required to undertake to conduct business with their customers. Distributed Ledger Technology (DLT) can be used as a coordination mechanism for financial institutions to share KYC costs in a common jurisdiction. Previous techniques that use DLT to support the KYC process, perhaps unexpectedly, introduce a single point of failure in the system. Indeed, financial institutions are vulnerable to repercussions if a single institution makes an operational mistake during the onboarding stage. We tackle this problem by introducing a probabilistic mechanism, where some of the financial institutions involved need to independently repeat the KYC process in the form of a randomised audit. This novel approach mitigates the single point of failure of the previous DLT-based KYC designs and introduces a natural trade-off between the security of the KYC process and its cost efficiency. In our approach the audit probability can be either set as a global DLT parameter or be dependent on attributes associated with the particular client.