The Bankchain Part IV: Centralized Exchanges & KYC Procedures
Over the course of three previous articles, the pros and cons of the bankchain concept have been thoroughly discussed. Even though most Bitcoin enthusiasts don’t see a viable future for private blockchains in the banking system, there are still a few aspects left to discuss. Regulation of bankchains will be important, and it remains to be seen how the Know-Your-Customer requirement will be tackled.
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The Impact of Bankchains On Decentralized Exchanges
One of the more interesting aspects of Bitcoin’s blockchain technology is how the digital currency is not regulated by a central bank or authority. This creates a promising scenario for exchanges, as Bitcoin is accessible to anyone in the world. There are always people looking to either buy or sell Bitcoin from exchanges.
Due to Bitcoin’s decentralized nature, one would expect digital currency exchanges to be decentralized as well, by definition. However, that is not the case in the current Bitcoin world, as nearly every exchange in existence will control users’ funds, either in Bitcoin or fiat currency.
In most cases, every user deposit is credited to an account belonging to the exchange itself. In a way, this is similar to how banks operate right now, as customers who deposit funds to their bank account trust the bank to keep their money safe. Withdrawals operate, in the same way, as customers will have to rely on the exchange to process the transaction on their behalf.
One could go as far as stating how most Bitcoin exchanges work in a centralized way, as there is no direct interaction between the peers executing trades. If this were to be the case, customers would have access to their funds – in Bitcoin and fiat currency – immediately, without relying on an intermediary service.
Despite the high number of currencies that can be issued on a blockchain, bankchains offer no guarantee for creating decentralized exchanges in the near future. A decentralized exchange would be accessible to all peers, all over the world, regardless of whether they are a customer of that particular bank. Keeping the Know-Your-Customer requirements in mind, decentralized exchanges are not likely in the world of bankchains.
Know-Your-Customer On The Bankchain
Every exchange platform in the world has to be aware of regulatory requirement changes for the area in which they serve customers. Bitcoin exchanges have the obligation to adhere to Know-Your-Customer (KYC) protocols and collect certain personal information on all of their users. In most cases, this information contains the full name, address, and even verification documents such as a scanned passport or government-issued ID. Regulators value this information, as it gives them a tool to prevent tax evasion.
The Bitcoin blockchain is transparent by nature and offers a certain level of pseudonymity for its users. Every Bitcoin wallet address contains a string of characters, but no details as to who owns the address in question. This is why nearly every company dealing with Bitcoin transfers will conduct some form of KYC procedure, verifying the identity of their customers.
As far as the concept of bankchains and KYC requirements are concerned, permission blockchain users will – most likely – prefer to deal with trusted parties only. A trusted party can come in the form of the bank itself, or one of their many partners, such as an insurance provider.
Establishing this level of trust can be achieved in two different ways. Option one would force all parties on the bankchain to be explicitly recognized. Another option to explore would be to create a more open system in which every individual peer will be required to perform their own KYC verification procedure.
The explicit recognition option seems to be more favorable for private blockchains, as the party controlling the bankchain can explicitly read and write permissions to every network participant. In this scenario, one central party can exert full control over the bankchain at any given time.
Making every network participant conduct their own Know-Your-Customer procedure is catering more towards public blockchain allowing permissioned access, such as Ripple. Every gateway can blacklist or whitelist certain address to prevent them from using any of the IOUs created on the blockchain.
What are your thoughts on the bankchain and the KYC protocol? Do you think there is a solution that can work for everyone? Let us know in the comments below!
Source: News Tip via Email
Images courtesy of Ripple, Shutterstock