In 2021, Bitcoin was a trillion dollar asset and this seems to be the tipping point of institutional interest in cryptocurrency. Nataxis Investment Managers conducted a recent survey that found 28% had invested in crypto and nearly 3% plan to increase their allocations.
The significance of this shift shouldn’t be underestimated. While banks were able to anticipate the potential for cryptocurrency to become the next major asset class over the years, very few took the plunge. Why? Why? Because regulatory concerns are too significant when they are compared to the overall value proposition for crypto.
So, it’s telling that the trillion-dollar year for Bitcoin seems to have swung the pendulum in the other direction. The regulatory environment hasn’t changed significantly, but the opportunity is now much greater than in previous years. The result is that financial institutions have the ability to tackle regulatory problems head-on. This is one reason why large financial houses are so keen on crypto compliance.
Recent news revealed that TRM Labs, a blockchain investigation firm, raised $60 million in Series A funding. Participating banks include American Express, Visa and Citi. This comes just months after Mastercard, a rival in the crypto-analytics market, acquired CipherTrace. Visa announced recently that it had established an advisory department to help financial companies make the move into digital assets.
This reflects the willingness of financial service firms to make significant investments to comply with their obligations.
An Onerous Burden
Already, the scale of banks’ compliance obligations is staggering. Global survey 2020 found that more than 5 percent of banks’ total revenue is spent on compliance. They are also losing the battle to lower costs. While technology has some advantages such as automated banking, most of the difficulty comes down to the persistence of paper-based management.
On average, the bank onboarding process takes thirty days. Customers are required to provide documents such as passports, income statements, and utility bills even though the electronic copy process is used.
The process heavily relies on humans for checking. Behavioral experts have pointed out this dependency on people as a weakness in the process. Not surprisingly, almost 10% of banks don’t have any process in place to keep client records up-to date. They also risk non-compliance under data protection laws, such as the EU GDPR.
Blockchain-based Identity – With an NFT Twist
Given the challenges, it’s hardly surprising that banks are prepared to invest in on-chain solutions that would help them to better identify illicit users and funds. One project developing a cutting-edge protocol for NFT-based identity issuance could be extremely promising in reducing onboarding time while decreasing firms’ data management obligations.
PhotoChromic is a platform on blockchain that allows users to secure own their identities and other personal data. PhotoChromic is unique in that it encapsulates biometrics, government-issued identification documents and personal attributes into an un-fungible token.
PhotoChromic also uses an innovation called generative art, which takes an image of the person’s face and applies an algorithm to generate an image used on the digital identity. It may be representative of the person’s visage, but if they choose to remain pseudonymous, they can generate any kind of image. The algorithmic link to the original image will result in generative art.
Transformation of the Onboarding Process
The net result is an easily-scannable image that can attest to an individual’s identity in real-time. They can decide to reveal what information and who they share it with, but they still have custody of their identity and documents. Financial institutions may see this solution as a significant opportunity to improve the onboarding process. It is impossible to duplicate or falsify the NFT identification. It’s very simple to authenticate and could even be checked by machines without requiring human verification.
Some of the biggest opportunities are in the potential to remove the need to keep copies of customers’ identity documents. The customer themselves retains full ownership over all of their personal data via the NFT – the KYC process becomes a mere scanning exercise, similar to a rail conductor checking a train ticket before boarding. Financial institutions are able to significantly lower their compliance with data protection regulations.
Additionally, banks and financial institutions can verify assets and users easily to give them a great deal of freedom in operating in cryptocurrency. It means they can consider new digital asset services and features, secure in the knowledge that they aren’t creating additional risks of money laundering or onboarding illicit users to their business.
It is appealing enough to integrate digital assets with all of the potential value found in these emerging markets. The financial sector could see an increase in value over the long-term due to the constant innovation and advancement in blockchain technology. This will allow banks to reduce rising compliance costs.