The key to getting more institutions onchain: Rethinking KYC

“Know Your Customer” (KYC) checks are often seen as an obstacle to bringing traditional finance onchain and to growing DeFi overall.

For anyone unfamiliar, these checks are a necessary part of financial institutions’ obligations under the Bank Secrecy Act (BSA) to combat money laundering and terrorist financing. The process requires coordination among issuers, verifiers, and regulators with different incentives, timelines, and legal requirements.

For banks, broker-dealers, and other BSA-covered institutions bringing tokenized products onchain, the challenge is reaching more customers and accessing liquidity, while meeting compliance requirements that can add time and complexity. Onboarding a new customer, for example, often means repeating identity checks that were already completed somewhere else. Fortunately, new KYC tools designed specifically for blockchains may help make verification more reusable than methods we’ve inherited from traditional finance.

The starting point is understanding who an institution needs to identify. In traditional finance, institutions transact through networks of identified intermediaries, and each institution satisfies its own KYC obligations. The same principle applies onchain in that the bank’s customer-identification obligations apply to its own customers and not to every participant in the underlying settlement infrastructure.