Blockchain is generating a large amount of buzz across the financial services industry because of the potential for complete industry disruption. Many banks are looking for applications of the blockchain to support bank operations. In particular, one key bank operation that requires many man hours and resources is around compliance (AML, KYC, etc), and efficiency and accuracy could be improved by leveraging the blockchain appropriately.

How Blockchain could help compliance  

Banks must abide by many regulations, such as the Banking Act in the Mauritius, regarding the on boarding and monitoring of clients to ensure they are not tied to illegal activities.

The blockchain infrastructure is also known as a distributed ledger system. That’s because it relies on several separate “nodes” to agree with one another in order for new data to be written – this makes incorrect data input almost impossible. The distributed nature of the blockchain ensures that data is consistently validated and can be referenced for historical purposes as needed (which helps for audit trails). Rules can also be integrated into the network that automatically trigger certain actions once an event occurs. For example, when transactions are flagged as suspicious, an automatic notification can be sent to the proper regulatory agency.

Blockchain applications in compliance

• One of the most exciting features of blockchain from the compliance perspective is its practical immutability: as soon as data is saved into the chain, it cannot be changed or deleted. That is why blockchain is used as the document or proof for the transfer of any digital asset, for example bitcoins or other digital currencies. By the same token, it can be used as record of ownership of physical property – an approach currently undergoing testing by Sweden’s national land survey, where a blockchain-powered system for registering and recording land titles is attempting to digitize real estate processes.

Blockchain’s immutability also lends itself to the application of proof-of-process for compliance.  Blockchain could be used to keep track of the steps required by regulation. Recording actions and their outputs immutably in a blockchain would create an audit trail for regulators to verify compliance.  Almost as importantly, regulators could have read-only, near real-time access into the private blockchain of financial organizations.  This would allow them to play a more proactive role and analyse information in real-time mode.  In other words, this brings them closer to becoming participants in – rather than customers of – the process. Such a change could reduce dramatically the time and effort (and therefore cost) that financial institutions spend on regulatory reporting, as well as improving the quality, accuracy and confidence of and in the process.

•  Another regulatory field where blockchain could play an important role is in KYC (know your customer) and AML (anti-money laundering). Banks and other financial institutions have to complete many tasks and steps as a part of the onboarding process for new clients. In addition to data collection, there are important rules around validation, confirmation and verification to be completed before new clients can be onboarded.  In some markets, the process can take several months.  Many of the steps could be eliminated if the information existed already in a secure, tamper-resistant database – an immutable blockchain. Any changes to customer data will be distributed to participants in the blockchain immediately. The chain would provide records of procedures and compliance activities for each client.  Blockchain would play the role of proof-of-process, so all that steps are easily traceable and regulators can be confident about the veracity of the information. Moreover, individuals would be co-custodians of the information on the blockchain, which could provide additional protection against identity theft (impacting or even disintermediating businesses like credit-monitoring services).
•  A further possible extension is blockchain as a digital identity management grid, with all information required for screening and compliance being held about individuals and/or firms in a chain.  This would reduce KYC/AML processes to simple automated checks of a blockchain-powered, market wide utility.  It is likely that sharing sensitive information about customers between financial organizations will start to become the norm once trust is established in a blockchain-enabled ecosystem.  Interestingly, SWIFT has announced that their own KYC registry, which already includes more than 1,000 member banks, will be shared with trusted partners and customers in the future.  This is one of the early steps to fully trusted digital identities in the industry – which must be the target business and legal outcome.

Clearly, with the rise of blockchain innovation and the growth of digital currencies, there will be some opportunities for banks to leverage this technology to create efficiencies. On the compliance front, while there may be a long time before full KYC and AML practices are integrated into the blockchain, pieces of the existing processes are ripe for change. For example, by using the blockchain with digital signatures, there can be a more seamless and secure process for document transfers with timestamps for auditing purposes. Once banks begin experimenting with approaches such as these, there may be more willingness to adopt blockchain solutions.

The Anglo African team can assist you in unlocking the full potential of FinTech for the prosper of your business. If you have any queries or if you would like further information, please contact us on 2331636 or by e-mail at contact@infosystems.mu.