Financial regulators and service providers are looking for the best and most cost-effective solutions to help the banks and other financial institutions comply with the rules and do business in a compliant regulatory environment.
As blockchain is already disrupting the conventional ways of doing businesses, thanks to its benefits in terms of enhanced transparency, faster procedures, decentralized and most importantly, cost-effective nature.
In essence, blockchain provides the solutions for the existing problems faced by financial institutions in terms of Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. As the transactions in the blockchain system are immutable, they cannot be changed and altered, providing transparency regarding AML and KYC compliance.
Customer onboarding screening, enhanced due diligence, transaction monitoring, blacklist screening, change in customer prospect status are the areas where blockchain technology plays a crucial role in handling AML and KYC-related issues.
Customer names can be screened through the automated regulatory compliance system; data can be verified in real-time, and compliance officers can automatically monitor transactions. The Danish banking solution is an example of implementing regulatory technology that aims to improve conventional payments related to significant card systems by using KYC data and compliance information with the help of blockchain technology.
AML and KYC
All the financial institutions are required to collect the customer data like IDs, employer’s data, expected business activities before doing business with them, which are a part of KYC and AML compliance procedures.
Traditionally, all the relevant data needs to be verified through independent sources and updated regularly or when the expected business activities change. Abiding by all these procedures manually is time-consuming and costly for the business. Blockchain applications already provide AML software in the cryptocurrency space where all KYC is handled efficiently and cost-effectively.
Similarly, the identity management crisis is another issue for the banks that needs to be stopped and prevent fraudulent activities. Current KYC systems frequently rely on a third party to authenticate a user's identity, which adds another layer of data sharing and risk to the transaction.
This antiquated practice may be addressed with trustless blockchain technology, which allows users to authenticate their identity securely while still maintaining control over their data. Additionally, blockchain can help verify the identity of a politically exposed person through biometrics analytics and social media analytics.
Transaction monitoring
The second significant service offered by regtech providers is monitoring the clients’ transactions in real-time.
Machine learning and artificial intelligence technologies algorithmically observe the behavior of clients while doing transactions and develop patterns to alert the compliance team if it finds any suspicious activities or red flags. Companies like Skry and Elliptic are developing this kind of solution.
Skry offers a data platform that offers regtech for financial services institutions and allows law enforcement agencies to generate real-time business intelligence and risk assessments from blockchains and decentralized applications.
Elliptic is a blockchain analysis tool that delivers anti-money laundering software to financial services and crypto exchanges. In addition, law enforcement has utilized the company's forensics tools to track Bitcoin terrorist funding.
Record keeping
Storing the data and then retrieving it can be challenging for internal use like auditing and operational use, but failing to protect it against hackers is also the key concern of financial institutions.
Despite their necessity, KYC processes are inefficient, involving time-consuming and labor-intensive manual processes, duplication of work and the possibility of 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 checks and information up to a certain level. Unlike a bank or financial accounting system, the ledger is distributed to all computers in the chain rather than being centralized.
A blockchain KYC utility could also provide authorities with a clearer knowledge 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.
