Beyond KYC: The Real Compliance Barriers Institutions Face Onchain Today | Nikhil Raghuveera & more!

All right, we have another panel uh beyond KYC, the real compliance barriers institutions face on chain today. So I will pass it off to the moderator, Aisha Keani, COO of Monarch Asset Management.

Thank you. Great. Um, we're going to get started just to be mindful of everyone's time. Um, this is actually my favorite topic in crypto. Part of the reason is because um I'm the COO CCO of Mavenarch Asset Management and we've been in the liquid market space for about nine years or so and I've been at the fund for 7 years and nothing makes me cry more than on boarding and KYC and it is such a disaster to see that how we're like doing all the big talk but when it comes to like the basic principle of onboarding someone um how it's a crying point.

So I'm so glad that East Denwood decided to have this of a point. Um we'll quickly do intros. Um I have some esteemed panelists here and then we'll jump right into questions.

Hi everyone. I'm Joshua Rivera. I'm one of the partners and the general counsel at Blockchain Capital. We're a venture capital firm. We invest in startups uh specifically building in the crypto and blockchain industry.

Uh we've been doing it for about 13 years. I've been there for about eight. We manage now uh 11 funds uh and about 2.8 billion in assets depending on uh you know what the price of digital assets are at any given point. Um and yeah uh I am delighted to be here next to two portfolio companies that we have recently invested in.

Um, I'm really here to just like display their greatness. Uh, they're they're the real experts. So, um, yeah, I'll just be directing most questions to them. Be great.

Uh, hey, I'm Nick Hill Orover, co-founder and CEO of Predicate. Uh, Joshua, I think you sell yourself a little short there given you're a general counsel and you've been in the space for a really long time and have had to deal with a lot of the policy questions around what we'll be talking about. But yeah, we build onchain policy infrastructure. So our whole thing is around how do we abstract away the incredibly boring compliance things that RWA projects, privacy projects, stable coins, regulated products. How do you abstract that away and have that enforced fully on chain?

Um, and so there's a lot of different pieces to that, whether that's, you know, AML, anti-moneyaundering, KYC, KYB, identity, all these different facets, but really we build infrastructure that is designed to abstract that all away while allowing all of this to be enforced on chain.

Hello everyone, my name is Chunda. I'm one of the co-founders of Paxos Labs, the newest initiative out of the Paxos ecosystem. Uh at Labs we focus on basically continuing the same uh vision that Paxos uh initially created which was building enterprise crypto capabilities meant for global markets and for global scale. So we focus primarily on trying to answer a lot of questions around compliance and how do can we get some of the biggest enterprises around the world in many different jurisdictions comfortable with the idea of adopting onchain technology and crypto capabilities directly within their platforms that they can go and then provide to their consumers. So, a very close partner uh and client of the predicate folks here.

Um, and it's been great to to talk about this topic which Nikil and I spend a lot of time almost on a daily basis jamming about.

So, wanted to run jump into it. Right. So, traditional KYC, right? Um, the thing with crypto, it's global. You're dealing with multiple jurisdictions.

You're dealing with multiple governing parties. you're dealing with multiple entities even you know whether you're Paxos you know um we're a fund based out of Cayman you know the UBO sits all around the world um and every single time I had to explain my own compliance procedure to any of you know the counterparty um it becomes a 70 to 80 email process how does onchain solves for that and before you go before it becomes more technical One thing I am also very mindful that all of these web 3 companies use the web 2 technology. So how do you solve for that? All right. So I think there's like a number of moving parts uh to your question.

The first one is is like why can't I use my same identity that I've already done with one organization and reuse that in another one. And I think this is fundamentally where KYC and particularly KYB break down, right? is because every organization especially a regulated institution is going to say that they have slightly different parameters or permutations of their KYB as well as the fact is that they also want to validate and know that you have done it with them because they don't want to trust someone else and I think that gets to the core aspect of there is no universal identity when it comes to regulated activity that hasn't happened right and we've seen you know cryptonative identity solutions try to say let's build a universal identity but I think really it comes down to the fact that the requirements for different organizations really varies. There is no consensus on that. What you can have is you can have some data sharing between different groups and I think that part is like really the best solution at the moment.

But I don't want to come up here and preach that you know there's another universal identity solution because this is not a cryp crypto is not the only group that has thought about universal identity. This has been going on for like at least the last two decades well before crypto. Um, I think the other part then to your question is how does onchain really allow you to do that? I don't think it does. I think it's actually that we want financial transaction to happen on chain.

So, how do you enforce KYC KYB requirements is really it that's I think where we're at and I think that's going to be the V1. The longtail is a universal identity. And then your last question around like a lot of the identity solutions still use web 2. And I think it comes down to product, right? Like if I go and use you know the existing web 2 identity solutions the biggest ones are you know sum persona all of those they have far more technology backing their entire system of having a more seamless process like it's not just face verification and passport right it's ongoing AML checks I noticed even in the last 6 months that some have improved their system significantly I think they heavily used AI to reduce false positives and reduce the requirement for manual review like we did an ICO last fall and the manual reviews that we had from then versus like a subsequent one dropped by like I don't know 60%.

And so you can see that they're actually advancing on the back end a much faster more product oriented system compared to what we've seen in the more cryptonative identity solutions so far.

Yeah. One thing I'll add on top of that is it's it's good to understand like where the origin of the complexity comes from, right? Um because it's it's pretty easy to kind of chalk up uh kind of identity complexity to jurisdictional complexity, but it also exists within jurisdictions. For example, you know, uh a crypto exchange will have very different compliance requirements to onboarding with Paxos, right? Um and the reason is is because different degrees of activity from consumers to enterprises to regulated versus a little bit more non-custodial activity will have differing degrees of compliance that are required by then that jurisdiction.

So you get this ballooning amount of complexity where you not only have different compliance requirements on a jurisdiction byjurisdiction basis, but you have differing degrees of compliance that are required within each jurisdiction. And so I think the the the really the only way to build uh solutions that are I I think could attack the problem in a more say realistic manner than requiring like universal ID or having some kind of internationally recognized universal ID. is that ideally a lot of the uh enterprises that are building out uh their onboarding solutions into crypto try to work with regulators and standardize a similar framework on an enterprise by enterprise basis. So ideally and then of course you know build relationships with each other where you can share data. This is something that you know we've done um to to some extent for some of our implementations where from an enterprise to enterprise basis uh even if you are two different enterprises integrating for example let's say a lending solution uh you're able to trust that we're using the same degree of uh compliance and then we offer differing degrees based on platform uh and then each of the enterprises you know the N plus1 enterprise for that given degree of compliance can trust.

Okay, I at least understand that every single other enterprise that's implemented into the solution is basically faced with the same degree of rigor that I am facing when onboarding onto the solution, right? And so when you build out standards like that either internally or across enterprises, then I you can kind of ease this this issue a little bit. Um but yeah, like NIL said, universal identity is it's been a long problem that uh and unless we have a completely uniolar uh identity solution across all jurisdictions, I don't I don't think we'll be there just quite yet.

Yeah. As said, compliance is a spectrum, right? And so given that you're going to have overlapping aspects across different organizations and different products and just different jurisdictions, but you have to navigate the fact that there is an entire spectrum across all of it.

Yeah. And so uh now that you two have displayed so eloquently why we invested in you, let me zoom out a little bit and give just a little bit of perspective on why building this infrastructure is so critical. We have created the crypto industry from a very different perspective from how kind of institutional compliance or or any even individual compliance w was created, right? Because all compliance over the course of history, right? All kind of transactions that are at scale over the course of history have happened via intermediaries.

And so intermediation has been the centralized point for determining compliance with identity rules. We built crypto ecosystems to be disintermediated, right? And so in order to maintain that characteristic of disintermediation which is so critical to the value of those ecosystems, what we have to do now to bridge traditional institutions that operate under a different paradigm, right? We have to create solutions that integrate into that disintermediation but that are modular and programmable for their very specific, very varied type of compliance. as Nikquille and Juna have just kind of expressed.

Um I wanted to add one thing to that. Um so first of all um the compliant part right like on on what you've invested in what and you know the two of you um I think that crypto has the AML focus and when I say AML I mean by money laundering specifically to the tea right we have all of these service providers like chain analysis you know TRM labs um you cannot miss one bitcoin transaction into like to a dark pool right we have built that monitoring system perfectly however when it comes to the counterparty that's where we kind of fail right because that counterparty could be could have presented all kinds of documents could have been verified whether onchain or offchain and it's very hard to basically check out the legitimacy so So that brings me to my next point which said um on AML right um something we had to come across recently and Joshua also touched it on a bit um we see our fun admin right um they're running across I think six or seven different lists OFAC and whatnot right of the Asian list and um the sanction list and a couple of weeks ago an investor gets flagged because of a Chinese character. And I I was like, "What do you mean?" And he, you know, the the fan admin is like, "Oh, they're labeled as a criminal in uh China and Taiwan." And I was like, "How do you how how do you do that?"

Right? Like pull out the database presented. The name was different in Chinese character and English character, right? And you just and I went back to the fun advent basically responsible for about 70 to 80 funds out there on labeling a perfect normal person as a criminal. Do you think we have an onchain solution for that?

Like we have figured out for money laundering yes going back to the blocks but how do we basically secure that identity? I mean I think this then it comes down to like a I think in this case you actually need proper digital identity right I imagine in this case it was this was flagged by it's the same name as someone else which always happens and I think the solution in KYC KYB world has historically been all right we need to do manual reviews here they need to send additional documentation information I think where this goes on crypto and this is where it gets interesting is more of your actual onchain identities I think there's an interesting overlap that hasn't happened yet or a connection between ZKTLS and onchain identity like take something like a world ID that you can have uh or you know like a ZK passport where you have your own sovereign identity but then you should be able to start adding these markers and flags via ZKTLS that is self-custodial but is directly tied to specifically your identity so that way if you do need to have these other flags that do come up it's something that's actually there already built in right and so it's those information flags that haven't happened yet and I think that automation and that sourcing of data is something that blockchain is actually uniquely able to do of pulling all these different pieces together.

Yeah. And I think like uh it's easy for us to forget how layered identity is traditionally, right? Like you go through life with various forms of identity and identity fe identity verification, right? You have your birth certificate, you have your passport, you have your driver's license, right? And so when you need to get your identity verified, um it's great.

It's so much fun. and you have to like go up in the attic, dig out your birth certificate, right? Like there's all these and it depends on what you're doing it for, right? If it's to get a passport that and you don't have a current passport, right? You have to there are all these various touch points of identity.

And so I think my my personal prediction is I I don't believe we're ever going to have one universal identity like natively digital identity. And you know, it'd be great if we had some disagreement on this panel. um despite the fact that we're all friends. Um but you know, so maybe that's controversial. I don't know.

Maybe I'll have to find something else to say that's controversial. But um I the way I see it happening is I think we're going to have identity checkpoints or identity kind of like data points or hashes if you want to be technical about it that utilize ZKTLS um you know other ZK technology like what world is building or ZK sync um or even other kind of oracles and touch points that that span into kind of the real world right and so I think your your identity is what we're building is we're building pieces of a digital identity infrastructure that will all have to speak to each other in and interact so that when you have checkpoints, right? You're able to quickly kind of distinguish one character from another because you're not actually looking at, you know, a, you know, a character list. You're actually looking at something that is much more tied to the person or to the institution.

Yeah. When you think about the how this would be implemented in practice um especially with the concept of ZKTLS like ZKTLS at its core is just uh a form of technology that allows you to create a secure and then ideally non-invasive way of attesting to arbitrary electronic information right usually you're verifying some like uh like websocket call um and because of that you can imagine a future where let's say this person gets flagged Right. Well, it's very easy for them to say, "Hey, like let me go and I have this address that's tied to every single kind of unit of my online and personal identity." And it could be things like passports, driver's license, but it could also be things like, hey, like here's my purchase history um uh for the last, you know, 5 years on, you know, so and so app on Amazon and every single like consumer app I've ever purchased. And you can see within that the location data of where I am, what payment solutions I'm using and then you know you can because it's ZK you can expose only the absolutely required information there.

For example, you could say hey this person isn't making purchases in a sanctioned region. This person is actually mostly making uh purchases in this region of which they say that they were doiciled in and not where this other person is doiciled in. And ideally, you can pull that information a lot quicker. So that way you're not having to do this awkward manual really like lunky process of, you know, pulling out, you know, ancient documents and taking photos uh of them in good lighting to to send to to some verification system.

So we we have about 3 minutes, one minute for each one of you. how far or how close we are into basically streamlining this maybe or it was all my day and uh but and NIL I know is considered an expert in this topic like on identity onchain identity so

yeah I mean I I think I think we're really far away um and you know I hopefully uh my fellow panelists disagree with that but Um, you know, our investing philosophy is we're we're really investing for a decade or more into the future. And right now, we're building the foundations for the things that we're talking about. And we've been talking about it from a really technical perspective, from kind of a philosophical perspective in terms of how we bridge a traditional financial ecosystem to a kind of bleeding edge financial ecosystem. And I think an aspirational perspective, right? like how h how should identity look in an in a world that is well integrated right and so I think it's going to take time because the way the the ecosystem is developing the the industry is developing is not in one line right you have all of these different types of protocols that are building things in different ways and we need to integrate them over time and so I think we're pretty far away but I'm very optimistic that we'll get I think we have to bucket kind of the different problems you're solving with identity, right?

So, proof of humanity, I think we're actually going to have that accelerated significantly in the next two years. Um, I think when we talk about regulated activity of like KYC, KYB, I don't think we're going to fully solve it. But I would say in the next 3 to 5 years, a number of the pain points that you're facing will likely be addressed. And that's because of kind of the merge that I'm seeing between both AI as well as uh ZKTLS and self-s sovereign identity systems that you can do. That's my take.

I don't think it's going to solve everything. I think the last part of that too is a big push is also from a government side, right, of digital identities that are created by governments like the most successful identity system so far you might say is in India, right? Because of Aadhar. So any of those types of initiatives accelerates this type of kind of connectivity much faster and so the next 3 to 5 years I think there'll be a lot of progress. Will all problems be solved?

No.

Yeah. uh to give a more practical uh kind of case based on our targets internally. Um currently uh we do mostly enterprise onboarding because we work directly with enterprises. Uh enterprise onboarding at Paxis takes about I'd say on average 7 days uh today by the end of the year we're trying to reduce that to within 48 hours. Um ideally 24 um so that gives you an idea where we're trying to get to by the end of this year.

Ideally, we can get it with between six to 12 in the year after. Um, and then in terms of automation, we're automating a lot of things around uh things like uh you know uh yield pass through on stable coins and and things of that nature uh on chain. Um and those improvements are going to come within the scope of this or next quarter. Uh so things that would usually take uh you know direct you know KYC with users that would take them you know call it minutes to to hours to get approval uh will happen in the time of seconds. So that could give a a little bit of a benchmark of kind of where we're going in the next 12 months at least internally on some of the work streams we're working on.

Thank you so much. Really thank you each one of you. I could go on and on and on about my pain points about this all day long. Uh, but we need to give up the space. Uh, thank you guys.

Thank you.

Thank you so much as well.