Dynamic Decentralized Social Trust for Financial Inclusion with Regulatory Compliance

Abstract

This paper proposes a dynamic, decentralized social trust model to meet Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance requirements, especially for individuals lacking formal documentation. Building on previous work, we present a conceptual model for dynamically computing trust and risk values to support financial transaction approvals through innovative recognition schemes. Agent-based simulations across four scenarios demonstrate that dynamic trust mechanisms enhance transaction approval rates and payment volumes, provided malicious agents are controlled. The model is flexible, adaptable to diverse populations, and promotes financial inclusion without compromising compliance requirements. It also offers a foundation for future research on mitigating risks from malicious actors. Furthermore, it is particularly suited for enabling compliant and inclusive decentralized finance (DeFi) applications.