Challenges and opportunities for KYC in the crypto industry in Africa

Know your customer, (hereafter KYC) is a standard with rules on the collection and storage of information about customers. It covers aspects such as identity, biometrics, place of residence and, to an advanced degree, creditworthiness. Furthermore, it can be extended to cover risk profile and exposure to events such as politics. This piece will delve into the importance of KYC, some challenges of KYC in Africa and opportunities for growth and better service.

Importance of KYC

KYC is akin to fuel for the service industry. How can companies serve people without relevant information about them? How will they improve services without insight into demand or customer satisfaction? KYC is a legal requirement in the financial industry, more so for crypto, because it is the first layer to create safeguards for both businesses and individuals engaging in the ecosystem.

Unlike the established financial industry, the crypto industry is developing its own framework to strike a balance between the promise of decentralized governance, identity anonymity and client protection. KYC is impossible to do without, and it can be done better.

Challenges facing KYC implementation in Africa

National identity systems

500 million inhabitants lack national identification. This happens because many countries do not register people at birth. Secondly, the cost problem arises with the physical delivery of identification cards. The difference in quality and dimensions of existing identity cards also makes them difficult to verify digitally using a phone camera. For example, the rollout of the Huduma number in Kenya in 2019 proposed a new identification system that integrates biometrics and functional data. However, the system was mired in controversy, as there was no data framework in place to support data collection. The legal community moved to challenge the process of the rollout in court, which would make the new system a win-win scenario for the country.

Biometrics

The diversity of the African continent’s societies remains one of its greatest advantages. But there is also a disadvantage in terms of biometrics. For example, machine learning algorithms lack the ability to pick up differences in skin tones, which puts darker skin tones at a disadvantage. In contrast, the same algorithms recognize Caucasian faces with great accuracy. Augmenting existing datasets also to improve facial recognition will go a long way in economic inclusion.

Address verification systems

Many buildings, both commercial and residential on the continent, are nameless. A simple utility bill or account statement cannot also capture one’s home address. About 57% of people do not have a formal bank account. A further 43% of the population lacks access to mains electricity on average. Millions still lack access to clean water for long periods. Reaching people where they are is a big challenge. Digitally functional companies may not all be able to do without verifiable proof of address.

Opportunities for growth

Africa is the most populous continent, with a youthful average age of 19. Potentially home to 1.5 billion people by 2025, Africa has many opportunities to serve people who will be diverse contributors to the global economy. The gaps in formal KYC infrastructure provide opportunities to bypass the same challenges.

Regulators, entrepreneurs and local communities must establish new avenues for service delivery with reduced cost implications and greater efficiency. Regulators need to expand collaboration platforms to invite Virtual Asset Service Providers (VASPs) with access to identity frameworks to provide insight into how they operate. It must be easier for authorities to understand VASP customer profiles, rather than covering them as rogue actors trading in unregulated instruments. In addition, access to identity verification frameworks will make it easier for VASPs to monitor suspicious or fraudulent activity on their platforms.

A good win-win scenario is for VASPs to access national identity systems to assist with financial occurrence investigations. Instances of fraud are impossible to track in cash, but possible in digital systems. What if VASPs could offer a trail of data on cases tracked over a period of time? It would be easier for law enforcement authorities to find criminals who might try to launder the proceeds of crime through their platforms. This collaboration must gain ground for a healthier economic ecosystem across the board. Several milestones must be covered.

Another solid win will be in relation to the SDG goals to reduce poverty. Through collaboration, VASPs can educate communities about best practices for investing in digital assets. This will limit the negative effect of fraud, and reduce the same communities’ exposure to market volatility through a better understanding of trends. Crypto assets offer a lower barrier to entry for potential investors, making them a fair way to learn personal investing. However, this is somewhat conditional on their access to KYC for better service delivery in relation to tailored educational content.

Collaboration is the foundation of this much-needed future, unlocking seamless trade and value transfer for communities on the continent.

Disclaimer: I own bitcoin and other cryptocurrencies.