Financial regulators and service providers are looking for the best and most cost-effective solutions to help banks and other financial institutions comply with the rules and do business in a compliant regulatory environment.
As blockchain is already disrupting conventional ways of doing business, thanks to its benefits in terms of increased transparency, faster procedures, decentralized nature, and most importantly, cost-effective.
In essence, blockchain provides the solutions for existing problems faced by financial institutions in terms of Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. As transactions in the blockchain system are immutable, they cannot be changed or altered, providing transparency regarding AML and KYC compliance.
Customer onboarding control, enhanced due diligence, transaction control, blacklist control, change in status of potential customers are the areas where blockchain technology plays a crucial role in handling the AML and KYC related issues.
Customer names can be filtered through the automated compliance system; data can be verified in real time and transactions can be automatically monitored by compliance officers. The Danish banking solution is an example of a regulatory technology implementation that aims to improve conventional payments related to major card systems by using KYC data and compliance information with the help of blockchain technology.
AML and KYC
All financial institutions are required to collect customer data such as IDs, employer details, expected business activities before doing business with them, which is part of KYC and AML compliance procedures.
Traditionally, all relevant data must be verified through independent sources and updated regularly or when expected business activities change. Complying with all these procedures manually is time consuming and costly for the company. Blockchain applications already provide AML software in the cryptocurrency space, where all KYC is handled efficiently and profitably.
Similarly, the identity management crisis is another problem for banks that needs to be stopped and fraudulent activity prevented. Today’s KYC systems often rely on a third party to authenticate a user’s identity, adding another layer of data exchange and risk to the transaction.
This outdated practice can be addressed with trustless blockchain technology, which allows users to securely authenticate their identity while maintaining control over their data. Furthermore, blockchain can help verify the identity of a politically exposed person through biometric analysis and social network analysis.
The second important service that regtech providers offer is monitoring customers’ transactions in real time.
Machine learning and artificial intelligence technologies algorithmically observe customer behavior as they transact and develop patterns to alert the compliance team if they find suspicious activity or red flags. Companies like Skry and Elliptic are developing this type of solution.
Skry offers a data platform that delivers regtech for financial services institutions and enables law enforcement agencies to generate real-time business intelligence and risk assessments from blockchains and decentralized applications.
Elliptic is a blockchain analytics tool that offers anti-money laundering software for financial services and cryptocurrency exchanges. In addition, law enforcement has used the company’s forensic tools to track Bitcoin terrorist financing.
Storing data and then retrieving it can be challenging for internal use, such as auditing and operational use, but failing to protect against hackers is also a top concern for financial institutions.
Despite its necessity, KYC processes are inefficient, involving time-consuming and labor-intensive manual processes, duplication of work, and the potential for error.
However, with blockchain, each time a KYC transaction occurs at a participating institution, the most up-to-date information is entered into the shared distributed ledger, allowing different institutions to rely on the same controls and information to some degree. Unlike a bank or financial accounting system, the general ledger is distributed to all the computers in the chain instead of being centralized.
A blockchain KYC utility could also provide authorities with a clearer understanding of how users have been onboarded and how the underlying KYC information has been applied. Companies like PeerNova monitor data quality and manage exceptions across internal and external data sources for financial institutions.