The Dark Side of Know Your Customer: How Confidential AI Can Safeguard Identity Data
In the financial sector, the notion of "trust" has become a dubious commodity. The implementation of modern Know Your Customer (KYC) systems was meant to reassure investors and regulators that institutions were taking steps to prevent illicit activity. However, these systems have proven woefully inadequate in their ability to prevent insider breaches.
The most insidious threat to KYC's integrity is no longer coming from hackers outside the system, but from insiders and vendors who are embedded within it. With the industry expanding its use of cloud providers, verification vendors, and outsourced review processes, the risk of data exposure has grown exponentially. In 2025, insider-related breaches accounted for 40% of all incidents, highlighting a disturbing trend.
KYC workflows require sensitive materials such as identity documents, biometric data, and account credentials to be moved across multiple systems, each granting more access to the blast radius. The consequences are severe: in 2025, roughly half of all breaches were due to misconfiguration and third-party vulnerabilities, resulting in an estimated 15-23% of breaches being caused by misconfigured systems alone.
The recent breach of a women-focused platform, "Tea," which exposed passports and personal information after a database was left publicly accessible, illustrates the dangers of basic architectural safeguards. Last year's breach statistics were staggering: over 12,000 confirmed breaches resulted in hundreds of millions of records being exposed, with supply-chain breaches averaging nearly one million lost per incident.
The permanent nature of identity data makes KYC databases particularly vulnerable to breaches. Once sensitive information is copied or accessed through compromised vendors, users may have to live with the consequences indefinitely. Financial institutions are not immune; breach response costs can lead to long-term commercial liabilities, including trust erosion and regulatory scrutiny.
Weak identity checks pose a systemic risk, as demonstrated by Lithuania's dismantling of SIM-farm networks that exploited weak KYC controls and SMS-based verification. This highlights how fragile identity verification becomes when treated as a box-ticking exercise rather than substantive verification.
Artificial intelligence (AI)-assisted compliance adds another layer of complexity to KYC systems. While many AI models are cloud-hosted, sensitive inputs are often transmitted beyond the institution's direct control, raising questions about data minimization and regulatory intent.
Enter confidential AI, which challenges the assumption that sensitive data must be visible to be verified. By executing code in hardware-isolated environments known as trusted execution environments (TEEs), confidential computing enables encryption not only at rest and in transit but also during processing. This provides verifiable isolation at the processor level, ensuring that even administrators with root access cannot view encrypted contents.
Research has demonstrated that technologies like Intel SGX, AMD SEV-SNP, and remote attestation can provide verifiable isolation at the processor level. Applied to KYC, confidential AI allows identity checks, biometric matching, and risk analysis to occur without exposing raw documents or personal data to reviewers, vendors, or cloud operators.
Reducing insider visibility is not an abstract security upgrade; it changes who bears risk and reassures users that submitting identity documents does not require blind trust in unseen employees or subcontractors. Institutions shrink their liability footprint by minimizing plaintext access to regulated data, while regulators gain stronger assurances that compliance systems align with data-minimization principles.
Critics argue that confidential AI adds operational complexity, but this concern is mitigated when comparing it to the existing opacity of vendor stacks and manual review queues. Hardware-based isolation is auditable in ways human process controls are not, aligning with regulatory momentum toward demonstrable safeguards rather than policy-only assurances.
Ultimately, KYC will remain mandatory across financial ecosystems, including crypto markets. However, its architecture must change to prioritize insider risk over centralizing identity data. Confidential AI does not eliminate all threats, but it challenges the assumption that sensitive data must be visible to be verified, setting a higher standard for compliance, security, and user trust.
In the financial sector, the notion of "trust" has become a dubious commodity. The implementation of modern Know Your Customer (KYC) systems was meant to reassure investors and regulators that institutions were taking steps to prevent illicit activity. However, these systems have proven woefully inadequate in their ability to prevent insider breaches.
The most insidious threat to KYC's integrity is no longer coming from hackers outside the system, but from insiders and vendors who are embedded within it. With the industry expanding its use of cloud providers, verification vendors, and outsourced review processes, the risk of data exposure has grown exponentially. In 2025, insider-related breaches accounted for 40% of all incidents, highlighting a disturbing trend.
KYC workflows require sensitive materials such as identity documents, biometric data, and account credentials to be moved across multiple systems, each granting more access to the blast radius. The consequences are severe: in 2025, roughly half of all breaches were due to misconfiguration and third-party vulnerabilities, resulting in an estimated 15-23% of breaches being caused by misconfigured systems alone.
The recent breach of a women-focused platform, "Tea," which exposed passports and personal information after a database was left publicly accessible, illustrates the dangers of basic architectural safeguards. Last year's breach statistics were staggering: over 12,000 confirmed breaches resulted in hundreds of millions of records being exposed, with supply-chain breaches averaging nearly one million lost per incident.
The permanent nature of identity data makes KYC databases particularly vulnerable to breaches. Once sensitive information is copied or accessed through compromised vendors, users may have to live with the consequences indefinitely. Financial institutions are not immune; breach response costs can lead to long-term commercial liabilities, including trust erosion and regulatory scrutiny.
Weak identity checks pose a systemic risk, as demonstrated by Lithuania's dismantling of SIM-farm networks that exploited weak KYC controls and SMS-based verification. This highlights how fragile identity verification becomes when treated as a box-ticking exercise rather than substantive verification.
Artificial intelligence (AI)-assisted compliance adds another layer of complexity to KYC systems. While many AI models are cloud-hosted, sensitive inputs are often transmitted beyond the institution's direct control, raising questions about data minimization and regulatory intent.
Enter confidential AI, which challenges the assumption that sensitive data must be visible to be verified. By executing code in hardware-isolated environments known as trusted execution environments (TEEs), confidential computing enables encryption not only at rest and in transit but also during processing. This provides verifiable isolation at the processor level, ensuring that even administrators with root access cannot view encrypted contents.
Research has demonstrated that technologies like Intel SGX, AMD SEV-SNP, and remote attestation can provide verifiable isolation at the processor level. Applied to KYC, confidential AI allows identity checks, biometric matching, and risk analysis to occur without exposing raw documents or personal data to reviewers, vendors, or cloud operators.
Reducing insider visibility is not an abstract security upgrade; it changes who bears risk and reassures users that submitting identity documents does not require blind trust in unseen employees or subcontractors. Institutions shrink their liability footprint by minimizing plaintext access to regulated data, while regulators gain stronger assurances that compliance systems align with data-minimization principles.
Critics argue that confidential AI adds operational complexity, but this concern is mitigated when comparing it to the existing opacity of vendor stacks and manual review queues. Hardware-based isolation is auditable in ways human process controls are not, aligning with regulatory momentum toward demonstrable safeguards rather than policy-only assurances.
Ultimately, KYC will remain mandatory across financial ecosystems, including crypto markets. However, its architecture must change to prioritize insider risk over centralizing identity data. Confidential AI does not eliminate all threats, but it challenges the assumption that sensitive data must be visible to be verified, setting a higher standard for compliance, security, and user trust.
... KYC systems are literally broken lol 40% of breaches caused by insiders is crazy 
how can we even trust the ppl in charge when their own systems are failing them? 
. And don't even get me started on the supply-chain breaches... it's like we're not even trying anymore 
how can we trust that's secure too?" 
it's like a shield around our sensitive data, protecting us from all the potential breaches and leaks out there 
just read that there were 12k confirmed breaches in 2024 where hundreds of millions of records got exposed 
meanwhile, Lithuania just took down a whole SIM-farm network because their KYC controls were weak 
and now we're told that confidential AI can provide verifiable isolation at the processor level 
40% of breaches in 2025 were caused by insider threats? that's wild. 
like, how do we know our sensitive data isn't being transmitted beyond the institution's control? 
this thing is like, encrypting stuff in hardware-isolated environments, which basically means even administrators can't see the encrypted contents. it's like, verifiable isolation at the processor level! 
hardware-based isolation is way more auditable than that. 
And the breach stats are wild, over 12k confirmed breaches already? 
. It's time to elevate our security standards and prioritize user trust over convenience (although let's be real, that's not always easy either 
).
They're already failing us with KYC systems. We need better solutions like confidential AI to safeguard our identity data. 
WE NEED TO MAKE SURE THAT OUR FINANCIAL INSTITUTIONS ARE WORKING WITH PARTNERS WHO SHARE OUR VALUES AND OUR COMMITMENT TO SECURITY!!!
. plus, it's auditable, which is a major win for regulators 
. we need to prioritize insider risk over centralizing identity data 
. The fact that 40% of incidents are now caused by insiders and vendors who have access to sensitive data is just terrifying 
.
.
It's like we're trading one problem for another. I guess the point of confidential AI is to make it harder for hackers to get our info, but isn't that just a fancy way of saying "we can't trust you with our data"? 
. with 40% of breaches coming from insiders and vendors, its like the whole system is broken 
. And yeah, misconfig and third-party vulnerabilities are basically the easiest way to breach these systems 
. It's like, we can encrypt everything at rest, in transit, AND during processing 
. So yeah, confidential AI is the future of KYC - let's get on board! 
.
. I mean, who needs to review millions of records when you can just leave them out in the open for anyone to see? It's not like that's a recipe for disaster or anything... 
it's like, a breeding ground for errors and security breaches. i mean, who wants their passport info outed on the dark web? 
. this is a major shift towards more concrete security measures, not just empty promises 
.
. KYC systems need a major overhaul, pronto 
!
12,000+ breaches in 2024 alone with hundreds of millions of records exposed. That's crazy! 
And it's not just about hackers outside the system, insider-related breaches are on the rise too - 40% in 2025. 
.
meanwhile 12k breaches last year is crazy anyone have a life hack to prevent these breaches