Decentralized Identity Proofing in Regulated Financial Institutions: A Privacy-by-Design Framework Using Permissioned Blockchain and Biometric Verification

Abstract

The financial services industry has a lot of challenges with identity proofing, especially with the rise of identity theft, data breaches, privacy concerns and regulatory requirements. The traditional identity management systems are based on the centralized model, which puts sensitive data of customers at risk of security breaches and unauthorized access. This study aims to present a privacy-by-design decentralized identity proofing framework that combines permissioned blockchain technology and biometric verification for a more secure and privacy-focused approach to decentralized identities in regulated financial environments, fostering security, privacy, and trust. The goal is to create a safe, tamper-proof and user-friendly identity verification system, as well as meet financial regulations. The methodology proposed is a permissioned blockchain network to store the identities of the users in a decentralized way, a biometric authentication mechanism to verify the user and smart contracts to automate the validation process. The consensus algorithm used is Practical Byzantine Fault Tolerance (PBFT) which is a secure and efficient transaction validation algorithm. The comparative parameters to evaluate performance were the accuracy of identity verification, the time latency of authentication, the rate of privacy preservation, the rate of fraud detection and the throughput of transactions. Experimental results show that the proposed framework can provide 98.7% identity verification accuracy, 97.9% fraud detection accuracy, 96.8% privacy preservation efficiency, and 95.6% regulatory compliance effectiveness, and also improve the authentication latency by 34.2% than the conventional centralized frameworks. The most important novelty is the integration of Decentralised ID Management, Biometric Verification and Privacy Preserving Blockchain Mechanisms in a regulatory compliant architecture. The results validate that the proposed framework is able to significantly enhance security, privacy, operational efficiency and trustworthiness in the modern financial identity proofing applications.