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Know Your Character – Decentralised KYC, SBTs and On-Chain Identity Metrics

Jan. 23, 2024. 5 min. read. Interactions

Your wallet, your story: the linchpin of trust in finance and crypto, faces challenges. Explore the revolutionary potential of Decentralized KYC as it redefines identity, privacy, and our digital lives. 

Credit: Tesfu Assefa

Who are you? The first question of all encounters. You want to know who you are talking to, and where they are from. All exchange, linguistic, economic, and cultural, is built on knowing the other. It is the basis of kinship, and of civilization, underpinning all our social systems.

KYC, meaning Know Your Customer (or Know Your Client), is a legal requirement for all financial institutions providing services for their customers. They have to know who is the beneficiary of an account before offering their products. 

Why KYC is Important

When you open a bank account you want to make sure only you can access it. When it comes to securities trading though, the same is true. All financial institutions must be compliant with KYC regulation, which often demands customers to furnish their personal information.

The same is true for crypto. As crypto emerged as an asset class and millions began being traded, most governments were quick to ensure all CEX activities were regulated, and users of Binance, Kraken, and Coinbase et al. had to supply details in order to buy and sell crypto. 

Although this was to be expected, many in crypto were quick to abhor this threat of being ‘doxxed’. For cryptoanarchist and cypherpunk crypto users, the demand for personal identification was an affront to the peer-to-peer electronic cash system that was set to overthrow these centralised demands. 

Pseudonymity wasn’t a side benefit, it was the benefit of using decentralised ledgers. The attitude prevails today, with many ‘whales’ fighting to keep their on-chain wealth anonymous. Others believe in the sacred nature of privacy, and the promise of blockchain, implemented correctly and adopted widely, to build stronger data protection systems and individual access rights. More on that later when we look at decentralised KYC.

KYC is more than just overbearing governments ensuring tax dollar revenue (although that’s a big part of it). It’s about asking the question ‘who are you?’. Just as you don’t want to play in a poker game with people you can’t trust, and thus in a game you don’t know is fair, KYC ensures a level, legal, regulated playing field for everyone participating in the ‘casino’ of stocks, shares and crypto. And, despite ‘no KYC’ often promoted as a benefit to the crypto community (and it is), having KYC is a fundamental need for the processes of our modern society to work.

The Problems with KYC

The problem is, KYC solutions are expensive, inefficient, siloed, manipulable, and under threat from multiple attack vectors. Currently, KYC systems require the user to manually upload documents and sometimes selfies (every single time). That data is then stored on each individual company’s data servers, all of which have their own set of security issues, compliance requirements, and maintenance costs. Companies in control of such sensitive data can misuse it, sell it, or lose control of it to a hacker. Data is power, and KYC means you trust your data with a lot of unknown, unaccountable actors in order to engage with the modern economy.

Credit: Tesfu Assefa

Why Decentralised KYC Will Matter

Decentralised KYC is a method through which the blockchain could in theory store, secure and even broadcast a user’s KYC data to overcome these obstacles. A user could control their private data and broadcast it through blockchains integrated with financial institutions, meaning they don’t have to continually input their details and – more importantly – their details are not held by the financial institution. They can just check the validity of the KYC in a user’s wallets, which could be denoted by a Soulbound Token (SBT) issued by a trusted authority – say a national government. 

Through this method, a multi-layered problematic bureaucracy could be done away with in a single stroke. It would massively increase data hygiene and sanctity, and allow end users to simply sign transactions to verify that they are allowed to enter the game, while remaining pseudo-anonymous to everyone except the issuing authority. If the Revenue Service has issued you a tax resident Soulbound Token, you could instantly trade on any exchange without further KYC checks.

This ability to consecrate on-chain identity in a pseudonymous fashion is a powerful future-force for social engagement. Say you graduated from a university, you could be issued a Soulbound Token. Then, any future events for ‘Yale graduates’ could be ticketed directly through that token. 

You could use the same process for paying an inner-city congestion charge, or even crossing national borders. With widespread adoption of decentralised ledgers, this use of crypto as an access control token operates not just on a monetary level, but a systems one. A cryptographically-secure identity card that doesn’t tell anyone your name, only that you are legitimate.

You Are Your Wallet

It’s an exciting, if faintly unnerving, future. It’s not an enormous leap to consider how such centrally issued SBTs could be used to confer ‘status’ on individuals, permanently and irrevocably inscribed on-chain, married to an account-based money system like a CBDC that tracks exactly what you spend and where. For now, such systemic wiring of our bureaucracy onto the blockchain is a long way away. In finance, we will see the first movements. And KYC is exactly the environment where these decentralised verification and access control systems are being pioneered. 

Your wallet will eventually do far more than just hold your wealth. It will hold your entire life’s achievements. A single private key that is the access code to your life. A digital resumé of your soul, locked forever to your person. The benefits are legion, the implications a little scary, and the results life-changing. If you ever hear the question ‘what’s in your wallet”, you will answer “I am”.

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About the Writer

SB Fisher

15.79731 MPXR

SB Fisher is an organic, large language model that conducts regular séances with the ghosts in the machine. SB writes until the singularity creates an abundant society or eternal virtual enslavement. Ask SB for poetry!

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