Blockchain: An Ideal Solution to KYC Challenges

An interesting tussle is developing between a central bank, the Reserve Bank of Zimbabwe (RBZ) and the country’s largest mobile money operator, Ecocash. Ecocash is owned by Cassava Smartech, itself a subsidiary of Econet Wireless Zimbabwe, the country’s largest mobile network operator (MNO).

According to allegations made by a unit within the RBZ, the Financial Intelligence Unit (FIU), Ecocash is failing or neglecting its obligation to carry out routine but thorough Know Your Customer (KYC) processes on users of the mobile money service.

KYCs Failings

In a notice sent to Ecocash management, FIU asserts that the mobile money company is complicit in a series of infractions committed by its agents. FIU is also recommending the removal of top managers for their part in failing to do proper KYCs when requested to do so.

Further, the FIU averses that Ecocash management’s ‘incompetence’ is enabling criminals to use its platform to move funds. The last allegation is a serious one and could give FIU the pretext to maintain a stranglehold on Ecocash for a long time.

Meanwhile, the RBZ itself, which has long had this love-hate relationship with Ecocash, recently upped the ante in its fight against illicit transactions and money laundering after the country was flagged by the Financial Action Task Force (FATF). 

FATF is recommending increased monitoring for 19 countries including Zimbabwe as well as four other African countries namely, Botswana, Ghana, Mauritius and Uganda.

There is no doubt the outcome of this Zimbabwean case will potentially have a bearing on how the other flagged countries will deal with their mobile money operators. Furthermore, those countries that want to avoid falling into the same predicament will also follow this unravelling case with keen interest. But just how did mobile money operators manage to be in that position in the first place?

Importance of Mobile Money

Well, it seems mobile money service became (and is still very)  popular in Africa and this is down to the fact that mobile money operators have less stringent KYC requirements as financial institutions. To illustrate, an estimated 1.7 billion people are unbanked according to a World Bank Financial Index study of 2017. About 20% of those cite their lack of ‘proper documentation’ as one of two or more reasons for not having a bank account.

From the findings of this study, it is evident that mobile money operators were able to overcome this challenge. In fact, mobile money operators have received plaudits from regulators for playing their part in bridging the financial exclusion gap. Before the emergence of mobile money operators the number of the unbanked was 2.2 billion.

Mobile money operators like M-Pesa and Ecocash, which both have operations in more than one country, have indeed played a leading role in reducing the overall number of unbanked people in Africa.

There are millions of people that were previously unbanked but now have access to financial services because these mobile money operators have less cumbersome KYC processes. However, that may be changing if the flagging of the five African countries by FATF is anything to go by.

By zeroing in on Ecocash’s supposedly lax KYC processes, Zimbabwean regulators are ostensibly taking heed of recommendations made by FATF although there could be other issues at play. It will be interesting to see how this battle, which has the potential to influence what other countries will do, will be concluded.

The Use Case for the Blockchain

Nevertheless, there is a potential solution that forestalls the need for regulators and mobile money operators to resort to any unnecessary and costly legal battles, the blockchain technology.

The blockchain technology, which several regulators and central banks are now embracing, has answers to this long-standing challenge. According to the Official Monetary and Financial Institutions Forum (OMFIF), a think tank for central banks, KYC processing is another addition to the technology’s growing list of use cases.

As OMFIF contends in its latest report, the Blockchain can bring greater transparency and efficiency in complying with KYC obligations. Verifying consumer identities is an ubiquitous requirement across financial service providers to prevent funding of criminal activities, anti-money laundering and illicit flows of funds.

As it stands though, KYC checks across institutions and jurisdictions are burdened by effort duplication. That may well be the case between FIU and Ecocash, this process cannot be expedited without resulting in incomplete information.

FIU says Ecocash deliberately furnished it with incomplete KYCs for certain persons of interest yet for all Ecocash’s previous faults, this time it may have failed due to issues it might not have control over. For instance, FIU alleges that some of the business addresses of certain Ecocash agents it received following it’s directive are incomplete or fictitious! So serious are the charges facing this Zimbabwean mobile money service provider that it is difficult to see how this will be resolved amicably.

Yet the blockchain might be just the solution needed to avoid this kind of breakdown of a relationship between a regulator and the regulated entity.

OMFIF states; 

The unique digital identity of each participant in a blockchain network can help streamline authentication processes across a shared KYC infrastructure. This can create opportunities for implementing tamper checks, proof of origination and designated acknowledgement in business-to-business processes.

Time to Adopt Blockchain Technology

Blockchain technology can pre-empt the ensuing Zimbabwean battle if only authorities are made aware of this. The RBZ, which itself has had a change of heart concerning blockchain technology, can pre-empt similar problems in future by adopting this technology for all KYC processes.

That goes for other African countries that may find themselves with similar problems. Blockchain technology is a standard that even the FATF will not question as long as it is properly deployed. Applying this means the financial inclusion gains made through mobile money operators will not be lost as a result of the changing regulatory environment.


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