How on-chain KYC can breathe new life into enterprise blockchain

Of all the developments in blockchain technology over recent years, enterprise adoption has perhaps been the most anticlimactic. As the initial coin offering bubble started to inflate during 2017, blockchain entrepreneurs and commentators alike were hyping the technology as a solution for almost every industry and business problem in existence. 

Fast-forward to 2020, and progress in enterprise blockchain has been lethargic at best. Almost without exception, notable implementations of enterprise “blockchain,” such as IBM’s Food Trust or Maersk-led Trade-ins, have used distributed permissioned ledgers.

Proponents of blockchain technology point to various reasons why businesses have been slow to adopt decentralized public blockchains. A lack of scalability, cryptocurrency volatility, or plain old business conservatism are all variously blamed.

Compliance: An often-overlooked consideration

Banks alone spend a total of $270 billion each year on compliance. To put that into context, the entire market cap of all cryptocurrencies is $320 billion at the time of writing, according to CoinMarketCap.

In the time since Bitcoin (BTC) first launched in 2009, we have seen developments that mean blockchains can scale to thousands of transactions per second. There has been a continual focus from developers on creating more privacy-centric tokens, despite the fact that crypto users are demonstrably apathetic toward them. A new model for consensus seems to pop up almost every other week.

But developing compliance-based solutions for enterprises has received precious little attention from the blockchain development community. As a result, any enterprise using a public blockchain has no way of knowing who is on the other side of a transaction.

As a result, enterprises are left with little or no choice. By avoiding blockchain altogether, they can avoid the risks of penalties that come with noncompliance.

Crypto industry compliance not fit for purpose

As the cryptocurrency sector has evolved, there has naturally been more demand for crypto to interact with traditional finance. This has led to a situation where many exchanges and wallet providers require some kind of Know Your Customer checks where users must prove their identity and residency, particularly if they want to transact significant values.

However, the main issue for regulators regarding the compliance of digital assets is that these pre-compliance checks are enforced only on a superficial level, rather than throughout the network as a whole. There are no objectively enforceable means of ensuring that bad actors can’t skip these checks and start transacting on the network.

Of course, this doesn’t mean that all users of all digital assets should need to undergo compliance checks. However, it’s becoming increasingly evident that if blockchain technology is to realize its true potential, enterprise adoption is crucial. Therefore, there needs to be a solution that unites the requirement for compliance with the technology itself.

Network-enforced compliance

Given that there is still no “one size fits all” approach to compliance in different countries, it’s possible to adapt the solution to the evolving legal requirements of any given jurisdiction. Therefore, an enterprise can provide trustless and immutable proof to the authorities in their jurisdiction that they’ve performed the necessary KYC checks on the counterparties to their transactions.

The benefits of such a generalized solution also go beyond pure compliance. A project issuing pre-compliant tokens could also define business rules for transaction fees that are also enforced by the consensus layer and can be adapted according to need.

Local and consortium blockchains aren’t the answer

If the idea of a pre-compliant asset on a public blockchain still seems trivial, then it’s worth looking to China as an example. The country is making impressive progress in the implementation of its Blockchain Service Network. However, as Vitalik Buterin recently pointed out and as evidenced by Western governments’ mistrust of Chinese tech firms like Huawei, it’s unlikely that any single state-sponsored blockchain project is going to achieve international adoption.

Without widespread adoption, platforms lose out on many of the benefits of a truly decentralized, secure public blockchain. This is ultimately why businesses implementing consortium-driven blockchain projects aren’t able to realize the full potential of the technology that was initially promised.

The strength of a public blockchain comes from its security and decentralization. However, the only way to achieve this is with a demonstrable compliance mechanism, giving enterprises full freedom to explore the potential of blockchain technology in their respective industries.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.