In every society’s evolution, there comes a point where specialization in the workforce starts to take place. Instead of families fending for themselves, building shelter, hunting, planting, making clothes, etc., communities form where some members might do the hunting, others might build, others might make tools, and others might farm. This is common knowledge because human civilization figured this out a long, long time ago. And yet, when faced with this same dilemma today, it still takes a while to figure out the smooth transition to specialization. Let’s explain.
The Web3 industry is very much like a newly formed society. We started with a handful of individual chains with limited utility. But then as time passed and communities grew, platforms were developed that could accomplish more than the chain itself. However, many of these platforms have taken a “jack of all trades” approach to Web3 development, writing the smart contracts, building infrastructure (even for L2 or L3 platforms), developing token creation, vetting customers, and setting up governance. While keeping all development in-house can have certain advantages, the industry is evolving to the point that a platform would need a massive staff of world class talent to build a leading edge platform. This simply isn’t feasible for most platforms, and even if it was, it’s not a good use of resources.
One key element that has gained much more scrutiny from all parties—the platform, regulators, partners, and customers—is the KYC/KYB (Know Your Customer / Know Your Business) verification process. There are growing risks and costs for those platforms developing their own solutions, and the benefits are dwindling. For Web3, the KYC/KYB process is a near-perfect case for specialization. And sure enough, there is growing specialization in this field, with platforms working to make this their key value proposition. In one case, leaders in different areas are teaming to develop a scalable solution for the entire industry, such as the partnership between FinClusive, cheqd and Verida for their KYC/KYB digital credential solution that creates a reusable process for platforms across blockchains, with the critical benefit of being regulatory compliant. But why is KYC/KYB such a perfect target for specialization, and why would Web3 platforms (especially large platforms) choose to purchase this service instead of making their own? Let’s dive in to the details of what problems KYC/KYB faces, what a full-service system should look like, and how it can benefit clients who use it.
Why is KYC/KYB so difficult?
In short, KYC/KYB problems fall into three categories: Regulation, cost, and time.
In Web3, regulation has been tricky for some time as it has to navigate ever-changing rules across many different countries, and any hope of a standardized system must accommodate them all or be efficiently customized for each. From the platform’s perspective, paying for each KY-process can add up quickly if it must be started from scratch for each new customer. From the customer’s side, prices for any service they purchase at a new platform will be higher (even if indirectly) because the cost of onboarding is higher, and this cost will always get passed on to the customer. In terms of time, this affects the customer significantly with the waiting for identity assurance. This process often involves multiple sources and if it takes too long, could lose customers to other platforms using a streamlined solution (either their own or a specialized third party service).
Combined, these problems are significant, especially because they are unnecessary now that specialized KYC/KYB has become a sub-industry for blockchains and platforms. When an in-house solution creates added risk, cost, and time, there is no reason to continue performing it.
Ideal KYC/KYB features
Now that an in-house solution seems to be a losing proposition, what should platforms look for in a proper KYC/KYB process? Any process should first and foremost guarantee that it is regulated and approved by the governing bodies where the platform will operate. It should also operate in a highly efficient manner, resulting in low turnaround times for each customer, and a low cost for the platform.
In terms of key features, a leading KYC/KYB solution should include the following. The core feature should be identity verification, and for as many countries as possible to ensure true global coverage. This verification should result in some type of digital credential, ensuring that for the platform and the customer that the full process only needs to occur once and can be both reused and verified. These credentials, in addition, should be securely stored for both customer and the platform, protected in a proper digital vault.
In order for platforms to easily use the process, they should be able to utilize endpoints so they can quickly request access to a KYC credential, verify the data, and validate the user’s identity. This speaks to the planned scalability of specialty platforms creating this service for many different platforms across many different chains, showing that a specialized service can benefit the entire ecosystem. Lastly, the system should be able to use these tools to protect against bad actors, so that if AML or other flags turn up during a screening, the credentials can be suspended or even revoked entirely so that platforms can ensure compliance to the laws where they are operating.
Benefits for the ecosystem
As mentioned above, specialized solutions can bring healthy benefits to those involved. In the case of KYC/KYB, all members of the ecosystem can benefit, even those across many different chains. In the case of FinClusive, cheqd and Verida, they estimate that cost savings for KYC/KYB verification can drop by a factor of 10x. A key part of this is efficiency, where specialists can minimize process steps, capture and secure credentials for reuse, and constantly monitor for regulatory changes. A key benefit for a scalable solution is interoperability between chains/platforms. The solution must work for a community that will continue to grow and evolve. A key part of this must be security/privacy, which a focused KYC/KYB service can provide better than a general service platform.
Looking ahead
KYC/KYB has a clear need for specialization in the Web3 industry, and it is a positive sign to see this happening. It will likely not take long for platforms to begin saving time and money by using these streamlined services for their customers. With this evolution, the industry should begin to discuss what other services could benefit greatly from platforms wishing to specialize for the entire ecosystem.
Featured image credit: Portuguese Gravity/Unsplash
