Progressive KYC

Promoting data self-sovereignty and bridging the social and economic gap through gradual onboarding the “unbankable” across tiered-levels of KYC 

KYC, or Know-Your-Customer, is the defining institutionalized gap that prevents marginalized populations from gaining access to exogenous financial services and social support.  Modern KYC practices cannot work in communities that have low financial and data literacy, where the ability of producing artifacts for KYC validation such as government identification and other verifiable records may be lacking for the vulnerable populations.  

We propose Progressive KYC (Know-Your-Community), which is a decentralized identity (DID) verification process that leverages existing systems of trust and validation endogenous to local communities. Progressive KYC allows stakeholders to extract value from data at different levels that correspond to their needs, data literacy, financial literacy, and willingness to participate in broader social relationships. In other words, as individuals participate more in their communities, they are able to engage with more types of social and financial activities:

• 0 - General User: can request and provide data assets in a Data Marketplace

• 1 - Community Member: can participate in voting, consensus decision-making and community tokens transactions

• 2 - Community Delegate: can participate in community-based lending, mortgage, equities and other types of finance

• 3 - Administrator/ Expert: can oversee the organization or group through assigning permissions and tasks, participate in research, evaluation, and auditing  

Through over four years of user research in developing communities of East Asia and Southeast Asia, we learned that when engaging in financial activities, people tend to verify the identities of people outside their community by inquiring which social group they belong to, for instance, a school, religious institution, or organization. In other words, the existing KYC in developing communities rely more on social relationships and trust than the submissions of vast amount of personal data. This form of KYC allows people to verify their identities by disclosing their affiliation to social groups, rather than revealing much of their personal information, which by nature fulfills many of the Cavoukian’s Eleven Fair Information Practices especially data minimization and collection limitation.

Progressive KYC can happen top-down or bottom-up. For large organizations like governments, development banks and INGOs, the trusted institution will be onboarded with the highest level of KYC Administrator who can create a Social Group in the system and invite people like program managers, village heads and community workers to become Community Delegates, who can then invite more people into the group as Community Members. Besides, stakeholders from outside the community like human rights watchdogs, auditors and researchers may also participate. For smaller organizations like agricultural cooperatives and village-based organizations, people can create Social Groups as relevant to their financial or social activities, and request approvals from credible stakeholders in the ecosystem.

Overall, Progressive KYC allows people lacking formal documentation to participate in financial activities such as peer-to-peer exchange, trading of digital assets, and cooperative finance, as well as social activities like voting, collective decision-making and project management.

We propose an organic process that learns from and mimics existing systems of trust. We approach ‘innovation’ from the bottom up; we are not avant garde, but rather carefully observing and learning from how the ‘crowd’ formed traditionally. We seek to translate social innovation - a process potentially formed more than a thousand year of trial and error in the community - into a digital tool. In this way we can scale the local intelligence of traditions where possible, instead of directly adapting globalism.

In addition to zero-knowledge proof, immutable data and tokenization strategies typical to blockchain DIDs, we create Identity compartmentalization that promotes tiers of anonymity. In this method, we allow users to share different types and amounts of personal information as necessary to participate in different types of social or financial activities. Identity data categories include:

1. Affiliation

2. Assets

3. Ability

4. Need

In short, we protect users’ privacy right by giving them the power to share only what they need to share. Also, we encrypt all of user’s data in our data storage, where we do not have the keys to decrypt it and only the data owner or user with access has the power to decrypt.

Progressive KYC is designed to adapt to nearly every type of last-mile economy in East Asia and Southeast Asia, whether formal or informal, acting as a gateway that helps to build data literacy and financial literacy towards more institutionalized KYC processes for financial, economic and social development. This builds an identification framework that builds a ladder from the informal into the formal in baby steps, or vice versa - allowing institutional systems to gain visibility and access across different hierarchies of KYC into informal systems.  

In terms of working in low-connectivity and low data literate communities, we have developed the Data Readiness Index (DRI), which helps us to assess what types of digital solutions are most optimal for deployment, where the speed of transactions and cost per data point may fluctuate accordingly, while maintaining the same data flow integrity. DRI is composed of three components:

1. Access to data infrastructure:

2. Ability to use data infrastructure

3. Willingness to participate in data infrastructure

When responding to the needs of the data illiterate in a digital identification system, not only it is important to ensure user friendliness of the technology, but also to utilize the network of data literate agents in the community to build data readiness of the people. Through Data Readiness Indexing (DRI), we identify people with higher abilities and willingness to participate in data infrastructure, and incentivize them to become Community Delegate who build people’s data readiness when on-boarding and inviting them into Social Groups overtime. 

Our system is built as an open SDK with APIs to ensure smooth interoperability and integration. Also, our blockchain network assures that it can interoperate with other different blockchain network.

For private data, we’ve set up granular permission design, which all users (L0) can access and control their personal data, but only Community Members who are affiliated to a Group (L1) can access Group’s aggregate data. As users become Community Delegate (L2), they can access the personal data of people they work with, whereas Administrator/ Expert (L3) by permission settings can only access Group’s aggregate data and receive anonymous signals. 

Through Data Readiness Indexing (DRI), we create solutions for communities with different levels of internet and smart devices coverage:

1. High coverage: people on-board themselves and claim affiliation to Social Groups

2. Limited coverage: community delegates help on-board and invite people into Social Groups when conducting community work

3. Very limited coverage: one or two locations serve as center of identification registration, printing out physical DID cards/ stickers with a.) public key (QR code), b.) username and c.) password hint, which allow offline identity verifications.

4. No coverage: people can use USSD technology to on-board.

Ultimately, progressive KYC is the gateway to access broader social and financial activities for people living in developing countries.  We seek to scale the adoption if progressive KYC by leveraging its ability to identify social and financial needs in developing communities, which can then allow governments, organizations, and communities to respond to those needs. To address this, we are currently developing and testing a wide array of social finance solutions based on smart contracts for developing, rural, and last-mile economies such as micro impact bonds, decentralized seed banks, cooperative finance, etc.   

Implementation Partners

• Brazil Ministry of Social Development (MDS) – Early Childhood Development policy

• China Research Development Foundation (CDRF) – Early Childhood Development program

• Hong Kong Council of Social Services – Time Bank  

• Malaysia Ministry of Human Resources & Liberty Shared – Human Rights Auditing  

• Myanmar Yangon Municipality – Municipality Bond

• Laos Ministry of Agriculture & World Food Programme – Seed loss prevention  

• Papua New Guinea Ministry of Agriculture – Coffee Trade

Knowledge Partner

• Chinese University of Hong Kong Alumni Charity Foundation

• University of Hong Kong Sustainability

• Columbia University

• Grassroots Economics

• IXO

Technology Partner

• Kyokan – DID & Wallet  

• XWings – Progressive KYC, decentralized transfer and exchange

We believe that solutions developed from the grassroots require careful listening from both social development and data literacy perspectives. Within our team we have a Digital Anthropology PHD, Masters in Social Development, community development experts, a Swiss banker, blockchain and fintech experts, and combined 50 years experience of working in social development non profits.

Meet our team here: https://shanzhaicity.com/about

Different monies from different KYC levels:

• Level 0 General User (who can participate in Data Marketplace) – as our solution facilitates data transactions between data suppliers and data solicitors, we take data transaction fee

• Level 1 Community Member (who can transfer community assets) – as our solution enables people in developing communities to transfer assets, we take the asset transactions fee (i.e. gas) to support the system

• Level 2 Community Delegate (who can manage social finance) – as we manage the assets of benefactors for beneficiaries, we take asset management fee (less than 1% compared to 2-20% taken by traditional asset manager).

• Level 3 Administrator/ Expert (who is at the highest level of KYC) – as we bridge people with informal KYCs with formal institutions, we take KYC transactions fee per KYC call or transaction  

We aspire that governments, financial institutions and non-profit organizations adopt our Progressive KYC design in order to expand the scope and coverage of social finance and social development with more eligible clients and recipients.

Our key barriers are mostly related to the legal and regulatory framework of identification and finance in different countries. We are taking the following actions to overcome them:

1. legal advocacy within developing governments - working with NGO advocacy institutions like Liberty Shared

2. Legal compliance with financial institutions - working with development and commercial banks

3. Data protection for Children - working with government institutions like CDRF & MDS