Securing DLT-based KYC via randomised audits

Matus Drgon, Lamprini Georgiou and Aggelos Kiayias
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Matus Drgon: Barclays, Tay House, UK
Lamprini Georgiou: University of Edinburgh School of Law, Appleton Tower, UK
Aggelos Kiayias: University of Edinburgh, UK

Journal of Digital Banking, 2021, vol. 6, issue 2, 181-192

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.

Keywords: KYC; DLT; Blockchain; RegTech; robustness; single point of failure; brittleness; machine learning (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:aza:jdb000:y:2021:v:6:i:2:p:181-192

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