December 20, 2017
Global efforts to prevent money laundering are incredibly expensive for financial firms. To complete Anti Money Laundering (AML) financial institutions have had to employ more people including risk management and operational compliance workers, which has increased their operational cost and led to unsustainability.
In 2014 it was estimated that global spending on AML compliance alone amounted to $10 billion (1). Meanwhile, investors and analysts create tension on financial institutions to reduce cost, but the compliance budgets, unfortunately, are expected to increase in the coming years. Hence, financial institutions worldwide are now turning to a technology which can serve as a possible solution to their AML challenge. Blockchain regtech appears to be an ideal option.
Money laundering is any attempted act to disguise any identity of illegally obtained funds (2). When discovered, money laundering cases can be seriously damaging for the financial institutions involved. It is estimated that around 2 trillion US dollars is laundered globally every year (3). Criminals do this by hiding the sources or moving the money to a place where it is less likely to attract attention.
The Bank Secrecy Act in the United States, for example, requires financial institutions to monitor their customers, report suspicious transactions, and maintain customer records to be audited by the government. They are required to monitor their ledgers for suspicious activities, especially with regards to money laundering. If a bank or other financial intermediaries notices something fishy, it is required to send a report to federal law enforcement officials, who then check it, based on reports from other institutions. If law enforcement notices a pattern of suspicious activity they investigate further. Such complex AML procedures, therefore, make its implementation time-consuming and costly.
Thanks to blockchain technology transactions can be more easily supervised, validated and recorded. Publishers of public ledgers and crypto miners are immediately notified of who transferred from one holder to another. Moreover, without verification of all phases of the transaction, including the departure wallet, the destination wallet, the type and amount of currency, the transaction is blocked instantly without human supervision, which means laundering will be extremely difficult to carry out.
Blockchain Regtech could also significantly improve the speed and effectiveness of AML efforts by creating a system-wide ledger that maintains all transactional data throughout a network of institutions. Thus, a network that includes all financial institutions can avoid the information asymmetry problem by giving law enforcement the ability to see the entire system’s ledger rather than just the suspicious activity reports currently submitted by individual institutions.
What’s more, blockchain is immutable, and by having client information accessible through such technology, a financial institution can directly access information on the blockchain rather than relying on a third party. Therefore, it could play a major role in streamlining the AML process. As data stored on a blockchain is irreversible, it would provide a single source of truth thereby minimising the risk of deception or human error.
For instance, Coinfirm (4), a foundation for the safe adoption and use of blockchain has recently developed an AML/CTF Platform (CTF stands for Counter-Terrorism Financing) using proprietary algorithms and big data analysis to provide structured, actionable data that increases efficiency, reduces costs and streamlines compliance to near automation.
A serious problem that blockchain needs to overcome is how to store the entire database at each institution while still protecting people’s privacy. It is crucial that financial institutions only be granted access to the relevant client data, but not others. Therefore, many elements of any future financial system blockchain would likely need to be encrypted to protect personal information and corporate secrets.
Despite some risks regarding security that blockchain regtech may bring, blockchain has increasingly captured the imagination of companies across industries and its enormous benefits have no signal to cease. With around 2 trillion US dollars laundered globally, AML performed by human efforts alone will definitely not effectively change the situation unless supported by technology. Thus, the development of blockchain regtech is essential. Though new technologies in the blockchain are in their development phase, they may provide a much better approach to resolve AML related issues.
Infinity Blockchain Labs (IBL) is a visionary R&D company engaged in intermediary and RegTech services employing blockchain technology. We focus on forming alliances with established businesses and regulatory institutions across various industries, as well as providing collaborative incubation for early stage blockchain projects. We aspire to empower Vietnam to become a global leader in blockchain. In our attempts to nurture a community which can leverage blockchain’s exceptional features, we are delighted to share and discuss blockchain potentials in countless industries, particularly in financial sectors. We are especially passionate about compliance and regulation and are certain that with increased awareness of blockchain, the necessary oversight for lending can be achieved and the technology can be adopted on a wide scale.
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