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Blockchain - Pull the chain; Unblock the Potential


Who is Satoshi Nakamoti? That has been the question on everyone’s lips since 2008, when the idea of Blockchain was first created. At this time, a person, (or group of people) under this alias founded Blockchain. The purpose- to create a public transaction ledger of the cryptocurrency Bitcoin. Originally the common consensus was that Blockchain and Bitcoin were self-similar, but not until 2014 did people begin to realise Blockchains adaptability and potential to be applied to different operations, (that is beyond the premise of preventing ‘double spending’[1], which is a potential flaw in nearly all digital cash schemes). The broadest and simplest view of blockchain is a time stamped series of records. The name itself explains the concept; the blocks are the data and the chain is the principles securing and binding the blocks.


Traditionally the blocks would contain transactional data, including, but not exclusively: date, time, value and the participants (both parties have a unique identifier). Although Blockchain is known because of Bitcoin, it could be used within modern transaction monitoring processes as well as Know Your Customer (KYC) operations. Data stored could be swapped out for client information such as name, address, DOB and additional identification documents such as passport or driving license. Furthermore, for example, firms that are required to adhere to MiFiD II, it could even contain LEI numbers. No matter the data stored in a block, each one is assigned a “Hash” which is the unique identifier of the block. That means, if a KYC team needed to pull certain data, (such as the above), they have a recorded of the hashes. The chain is simply the process of the transaction occurring or the data being entered, validation of the data and the hash being assigned to the block.


The beauty of blockchain is that the data validation process can be made autonomous, when a transaction occurs or client data is entered the data is automatically uploaded into the system. Before the data can be added to the chain the veracity of it is verified by the group of computers in the system which can be up to millions, they used predetermined parameters in an algorithm to verify the data. However, this clearly would not work for documents such as a passport as there would be no way for the system to verify the document. This is where blockchains versatility comes into play; the document would instantly be transferred to a predetermined institution/s where an individual can accept the document and then it gets accepted into the block and becomes available to the users of the chain.


So, how can blockchain streamline the KYC process and minimize inefficiencies? The clear benefit is the autonomous data validation, this would drastically reduce the time spent reconciling documents, freeing up time to spend assessing client risk. Currently financial institutions do not share information among each other and as a result they are expending countless resources duplicating work. The move to blockchain would stop this as validated data would be available to the community in a safe and secure environment. As a result, a client would no longer need to submit the same data to multiple financial institutions for them all the individually validate. In addition, the number of false positives reviewed would significantly decrease as once they have been reviewed, they would be clearly visible to the community and would not need to be reviewed each time.


The biggest benefit of the technology can be seen in transaction monitoring, essentially the whole AML fraud detection process could become autonomous. This would require an algorithm with a specified set of parameters, the most important being the unique ID for everyone. The technology would work in such a way that it would be able to detect and flag or even stop fraudulent transactions, as they are continuously monitored by the network. The driving force behind this making it all work is that the chain would have a complete overview all the previous transactions made through the participating institutions, with no need for teams of people to manually sift through them.

[1] ‘Double Spending’ definition: a potential flaw in digital currencies, whereby the digital currency token can be ‘spent’ more than once.


For more information please contact info@lysisfinancial.com

By Bailey Goodman, Consultant at Lysis Group

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