Know-Your-Customer (KYC) Requirements for Initial Coin Offerings

Nadine Kathrin Ostern () and Johannes Riedel ()
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Nadine Kathrin Ostern: Frankfurt School of Finance and Management
Johannes Riedel: Technical University Darmstadt

Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, 2021, vol. 63, issue 5, No 6, 567 pages

Abstract: Abstract Blockchain technology is often proposed as an infrastructure for decentralized Know-Your-Customer (KYC) verification, i.e., a process determining whether a customer is eligible for a given transaction. The benefit of using blockchain technology lies in the expected compliance costs reduction for companies by automatically enforcing KYC-requirements, whose results are accessible by multiple financial institutions. While information systems researchers have proposed conceptual models and prototypes of blockchain-based KYC-systems, they do not yet consider severe penalties that are applicable to companies if KYC-requirements are not met. Hence, if the legal requirements for KYC-processes cannot be met, these systems are not applicable. The paper uses an objective-centered design science research approach to develop a blockchain-based KYC-system for the conduct of ICOs that is compliant-by-design. To this end, the authors first identify existing KYC-requirements and define corresponding system design objectives that are used to develop a KYC-system that automatically enforces KYC-regulations, thereby preventing money laundering and other forms of identity fraud. Second, the authors contribute to the literature by providing a blueprint for compliant-by-design blockchain-based KYC-systems, in the paper, integrated into the investment flow of an ICO. Third, the authors propose a KYC-system that is applicable in the real world, by making – due to legal certainty – KYC-processes cost-effective, i.e., the proposed blockchain-based KYC-system expectably reduces compliance costs for customers and financial organizations.

Keywords: Blockchain; Distributed ledger; Know-your-customer; Anti-money-laundering; Initial coin offering; Compliance-by-design; Design science research (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s12599-020-00677-6

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