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Know-Your-Customer (KYC) Requirements for Initial Coin Offerings

Author

Listed:
  • Nadine Kathrin Ostern

    (Frankfurt School of Finance and Management)

  • Johannes Riedel

    (Technical University Darmstadt)

Abstract

Blockchain technology is often proposed as an infrastructure for decentralized Know-Your-Customer (KYC) verification, i.e., a process determining whether a customer is eligible for a given transaction. The benefit of using blockchain technology lies in the expected compliance costs reduction for companies by automatically enforcing KYC-requirements, whose results are accessible by multiple financial institutions. While information systems researchers have proposed conceptual models and prototypes of blockchain-based KYC-systems, they do not yet consider severe penalties that are applicable to companies if KYC-requirements are not met. Hence, if the legal requirements for KYC-processes cannot be met, these systems are not applicable. The paper uses an objective-centered design science research approach to develop a blockchain-based KYC-system for the conduct of ICOs that is compliant-by-design. To this end, the authors first identify existing KYC-requirements and define corresponding system design objectives that are used to develop a KYC-system that automatically enforces KYC-regulations, thereby preventing money laundering and other forms of identity fraud. Second, the authors contribute to the literature by providing a blueprint for compliant-by-design blockchain-based KYC-systems, in the paper, integrated into the investment flow of an ICO. Third, the authors propose a KYC-system that is applicable in the real world, by making – due to legal certainty – KYC-processes cost-effective, i.e., the proposed blockchain-based KYC-system expectably reduces compliance costs for customers and financial organizations.

Suggested Citation

  • Nadine Kathrin Ostern & Johannes Riedel, 2021. "Know-Your-Customer (KYC) Requirements for Initial Coin Offerings," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 63(5), pages 551-567, October.
    • Handle: RePEc:spr:binfse:v:63:y:2021:i:5:d:10.1007_s12599-020-00677-6
    DOI: 10.1007/s12599-020-00677-6
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    References listed on IDEAS

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    Cited by:

    1. Ravi Kashyap, 2023. "DeFi Security: Turning The Weakest Link Into The Strongest Attraction," Papers 2312.00033, arXiv.org.

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