XRP News: New Feature on XRPL Enhances KYC/AML Compliance with Secure and Private Identity Verification

• The XRPL is on track for a new amendment to bolster identity verification.
• Dubbed Credentials, it will bolster the shift toward compliance with XRPL protocols.

The XRP Ledger (XRPL), a decentralized blockchain, is getting another major upgrade with the introduction of Credentials. This new tool is a feature designed to make identity verification more secure and private. Credentials on XRP Ledger will ensure that users can prove themselves without exposing sensitive personal details. 

It is a game-changer for businesses and institutions that must comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. While still keeping transactions efficient and private. 

What Are Credentials and How Does It Work?

Credentials are digital proof of identity and are stored directly on the XRPL. This feature is designed to allow users to verify their identity securely and lightweight. The RippleX team introduced the XLS-70 specification last year, which is now in the process of approval. 

This upgrade lays the foundation for institutional-grade decentralized finance (DeFi). It will ensure that businesses operate in compliance with regulations without sacrificing privacy. Also, this new feature follows the implementation of the Automated Market Maker Clawback amendment on XRPL. 

As highlighted in our previous article, the Clawback upgrade introduces new regulatory-focused rules governing liquidity pools, particularly for tokens requiring enhanced compliance. 

Meanwhile, Credentials introduce a new ledger object that includes information like the issuer, the subject, and who these belong to. It also specifies the type of credential, such as KYC approval, and includes an expiration date, if applicable.

Image Source: Mayukha Vadari on X

A flag will then indicate whether the subject has accepted the credential. Notably, a credential is only valid when the user accepts it and hasn’t expired. Once received, the user takes responsibility for holding the credential rather than the issuer.

One of the biggest upgrades from Credentials is an improvement to the Deposit Authorization. This feature lets users block incoming payments from unknown senders, ensuring that only pre-approved transactions go through. 

Notably, a tool like Credential is poised to help prevent millions of dollars in losses from crypto hacks and scams, as covered in our last report. This upgrade will verify identities and protect against unauthorized access, significantly reducing the risk of fraud.

Meanwhile, transactions that need credentials must include a CredentialIDs field, which the ledger checks before allowing the transaction. XRPL is introducing three new transaction types to support this system: CredentialCreate, CredentialAccept, and CredentialDelete. 

The CredentialCreate allows issuers to create user credentials, while the CredentialAccept lets users accept credentials, confirming they are valid. CredentialDelete enables the issuer or user to delete a credential when it is no longer needed. 

These features will make onboarding smoother, enabling users to verify their identity quickly without requiring lengthy manual processes.

The Future: Permissioned Domains and a Permissioned DEX

Credentials are just the beginning. RippleX has plans to build Permissioned Domains and a Permissioned DEX on top of this system. A Permissioned Domain will be a controlled environment on XRPL where only users with specific credentials can participate. 

This can help businesses create secure spaces where only verified users can join and transact. It is important to note that only users with the proper credentials can be part of a domain. Instead of exposing personal data, it enables users to prove they hold a valid credential simply.

Also, businesses can enforce KYC/AML rules without making processes complicated.

A Permissioned Decentralized Exchange (DEX) extends XRPL’s existing DEX capabilities by adding rules to determine who can trade. This system ensures that users can only trade with others with valid credentials. 

It would also allow banks and financial institutions to use the XRPL DEX while maintaining strict regulatory compliance. Despite these rules, the system will remain decentralized. 

The system will be designed to keep everything on XRPL rather than creating separate private blockchains to ensure compliance.