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Securing DLT-based KYC via randomised audits

Author

Listed:
  • Drgon, Matus

    (Barclays, Tay House, UK)

  • Georgiou, Lamprini

    (University of Edinburgh School of Law, Appleton Tower, UK)

  • Kiayias, Aggelos

    (University of Edinburgh, UK)

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.

Suggested Citation

  • Drgon, Matus & Georgiou, Lamprini & Kiayias, Aggelos, 2021. "Securing DLT-based KYC via randomised audits," Journal of Digital Banking, Henry Stewart Publications, vol. 6(2), pages 181-192, September.
    • Handle: RePEc:aza:jdb000:y:2021:v:6:i:2:p:181-192
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    More about this item

    Keywords

    KYC; DLT; Blockchain; RegTech; robustness; single point of failure; brittleness; machine learning;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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