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A blockchain revolution in “RegTech”

The breadth of global regulatory change imposed on financial services since the crisis of 2008 has been significant.  The sector has been inundated with a plethora of new rules and regulations to follow which has consumed resources and spend in the already strapped compliance space.  Whilst the fintech industry has boomed by providing its tech-minded clientele with new innovative products, regulators across the world have failed to fully grasp and get ahead of how this type of technology will revolutionise the way in which the industry copes with these burdens.  “RegTech” is the new buzzword on the street and refers to how clever, disruptive, technology will service the regulatory sector.

Still new in the regulatory space, many foresee that blockchain technology has the potential to create seismic change vis-à-vis how firms respond to the demands imposed on them. Whilst we still guess as to how and when blockchain will impact the industry, it is safe to assume that KYC (know your client), AML (anti-money laundering) and regulatory reporting will be three key areas.

Today, KYC tasks are repetitive which result in data inconsistencies, mistakes, and a duplication of processes.  These tasks are also faced with the challenges of using different internal and external systems, leading to the implementation of manual solutions to bridge end-to-end operational procedures.  AML compliance requires extensive documentation requests and verification, as well as proof of identity. These antiquitous processes are not only frustrating but create an environment prone to risk and can take up to months to satisfy the regulators’ requirements.

The sector has been inundated with a plethora of new rules and regulations to follow which has consumed resources and spend in the already strapped compliance space.

The use of blockchain would introduce a shared ledger.  The benefits here are clear: the processes can be monitored and adjusted in a more efficient way.  Due to the shared nature of the ledger, a comprehensive database of client activity and background information would be available to all on the network.  This would mean that any updates or changes to this information would be communicated and updated in real time; making it much more likely to detect a potential scam or fraudulent transaction.  Giving all departments access to the ledger would give them all the client background information and account activity needed and create an efficiently seamless stream of knowledge throughout

Another key feature here is blockchain’s immutability.  Once data is inputted and saved into the ledger it can never be changed or deleted.  For this reason, blockchain has been used as the document of proof when transferring digital assets; and therefore can lend itself to the application of proof-of-process for compliance. The ledger can be used to keep track of the many steps required by the regulators.  By recording actions and their outputs, an audit trail to verify compliance would have been created.  Due to the immutability of the records there would be no reason to dispute them.

Many regulators require structured, well-defined and complete risk data reporting.  Today, firms still rely on manual and archaic partially automated processes and some regulators receiving these mandatory datasets are ill-equipped to manage them adequately.  Blockchain would make the process easier for both.  Since the data is shared, regulators would not have to collect, store, reconcile and aggregate the information for themselves. All transactions are documented immutably on the distributed ledger providing a comprehensive, secure, precise, irreversible, and permanent audit trail.  Introducing one shared platform would remove the requirement for each to hold its own replicated records.  It would also mean the records would be updated in real time and could vastly improve the speed and quality of review processes by eliminating the need for reconciliation.

The financial services industry would benefit from a more efficient regulatory reporting process since the distributed ledger would act as both an execution platform and a mechanism to store transactional information. The introduction of this type of “RegTech” would significantly improve the ability to resolve compliance issues, react to new regulatory and compliance obligations and address internal audit requirements in a timely and cost-effective manner; as well as improve the quality, accuracy and confidence of and in the process.

By Andrew Frost; Director, Investment Management Solutions at Lawson Conner


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