The future of KYC on Blockchain

This article explores the benefits and drawbacks of using Zero-Knowledge proofs (ZK proofs), Self-Sovereign Identity (SSI) and traditional KYC methods as a solutions for Know-Your-Customer (KYC) compliance on blockchain. We will compare them, examining their strengths and weaknesses in terms of security, privacy, and efficiency.

Please note that the author of this article is not currently connected with any KYC provider and that the opinions expressed in this article are based on his own experience and research. The information provided in this article should not be taken as legal or financial advice and readers are encouraged to conduct their own research and consult with professionals in the field before making any decisions.

How to realize KYC for Blockchain projects?

There are several ways to realize KYC for blockchain projects. Here are some common methods:

1. Third-party KYC service providers: One way to implement KYC on blockchain is to use third-party service providers that specialize in KYC and AML (Anti-Money Laundering) compliance. These providers can perform the necessary checks and verification on behalf of the blockchain project, and provide the project with a report or score that confirms the customer’s identity.
2. Self-sovereign identity (SSI) systems: SSI systems enable individuals to own and control their own digital identity. This means that customers can create their own digital identities, which are stored on the blockchain and can be shared with authorized parties as needed. This method puts customers in control of their personal information and reduces the need for centralized KYC processes.
3. Zero-Knowledge Proofs (ZK proofs): ZK proofs can be used to verify a customer’s identity without revealing their personal information. This method allows customers to prove their identity while keeping their personal information private. ZK proofs are becoming increasingly popular for KYC on blockchain as they provide a high level of security and privacy.
4. Hybrid models: Many blockchain projects use a combination of the above methods to achieve KYC compliance. For example, a project may use a third-party KYC service provider to perform initial checks, and then use an SSI system or ZK proofs to manage ongoing verification.

It’s important to note that KYC compliance on blockchain can vary depending on the specific project and its regulatory requirements. It’s essential for blockchain projects to consult with legal experts to ensure they comply with all applicable regulations.

The past: Using KYC Provider

Using a KYC provider is an old but convenient solution for achieving KYC compliance on blockchain projects. By outsourcing KYC to a third-party provider, blockchain projects can save time and resources by leveraging the provider’s expertise and technology. KYC providers have established processes and procedures for collecting and verifying customer information, and they can provide comprehensive reports or scores that confirm a customer’s identity. Additionally, KYC providers can help blockchain projects comply with regulatory requirements, such as AML regulations, and reduce the risk of fraud and money laundering. While using a KYC provider may not provide the same level of privacy and decentralization as other methods like SSI or ZK proofs, it remains a widely used and effective solution for KYC on blockchain.

New meta: ZK-Proof

Zero-Knowledge Proofs (ZK-proofs) have emerged as a new meta of KYC in blockchain, offering a highly secure and privacy-preserving approach to verifying identities. ZK-proofs allow individuals to prove that they possess certain information, such as a government-issued ID or proof of address, without revealing the actual information itself. This approach is highly desirable for KYC on blockchain since it allows individuals to maintain their privacy while still proving their identity to authorized parties.

However, there are also several challenges and limitations associated with ZK-proofs. One of the primary challenges is that ZK-proofs require significant computational resources and expertise to implement, making them more difficult and expensive to use than other KYC methods. Additionally, there is a risk that ZK-proofs could be compromised or manipulated, leading to unauthorized access or fraudulent activity.

Another challenge with ZK-proofs is the lack of standardization and interoperability. While there are several ZK-proof frameworks available, they are not yet widely adopted or standardized, which could limit their usefulness for KYC on blockchain. Additionally, there is a risk that ZK-proofs could create new forms of exclusion or discrimination, particularly for those who do not have access to the necessary computational resources or expertise. To address these challenges, the industry is working on developing new standards and protocols for ZK-proofs, as well as tools and frameworks to make them more accessible and user-friendly.

The future: SSI

While self-sovereign identity (SSI) systems offer numerous benefits, there are also several concerns around their safety and security. One of the primary issues with SSI is the potential for identity theft or fraud. Since SSI systems rely on individuals to manage their own digital identities, there is a risk that bad actors could steal or manipulate a person’s identity, leading to unauthorized access to their personal information or financial accounts.

Another challenge with SSI systems is the lack of standardization and interoperability. Since there are no standardized protocols or frameworks for SSI, it can be difficult for different systems to communicate with each other, leading to fragmentation and limited adoption.

To address these concerns, the industry is working on developing new standards and protocols for SSI, such as the W3C’s Decentralized Identifiers (DIDs) and Verifiable Credentials (VCs) frameworks. These standards aim to create a more interoperable and secure SSI ecosystem, while also addressing issues around privacy, consent, and inclusivity. It’s important for blockchain projects to carefully consider the risks and benefits of SSI, and work with trusted partners and industry experts to implement secure and effective SSI systems.

The future that won’t come

In conclusion, both SSI and ZK-proofs offer innovative and promising solutions for KYC in blockchain. However, they both come with their own set of challenges and limitations that need to be addressed before they can be widely adopted. SSI needs to resolve issues around standardization, interoperability, and security, while ZK-proofs need to overcome concerns around regulatory compliance and scalability.

In the meantime, traditional KYC methods remain a reliable and time-tested solution for KYC in blockchain. While they may not offer the same level of privacy or security as SSI or ZK-proofs, they provide regulators with the real data and documentation they need to ensure compliance with AML/CFT regulations and prevent financial crimes. As the blockchain industry continues to evolve, it’s important to recognize that there is no one-size-fits-all solution for KYC, and that different approaches may be needed for different use cases and applications.

In the upcoming articles, I will delve deeper into the advantages and limitations of ZK-proofs for KYC in blockchain. While ZK-proofs offer a highly secure and privacy-preserving approach to verifying identities, there are still many questions around scalability, regulatory compliance, and user-friendliness that need to be addressed.

Additionally, I have intentionally skipped discussing Soulbound Tokens (SBT) in this article, as I believe it is a promising technology that has the potential to revolutionize identity management on blockchain. In the next articles, I will explore the benefits and drawbacks of SBT in more detail and compare it to other approaches to KYC in blockchain.