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 advantages in terms of increased transparency, faster procedures, decentralization and, above all, cost-effective nature.
Essentially, blockchain provides the solutions to the 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 and altered, providing transparency regarding AML and KYC compliance.
Customer onboarding filtering, enhanced due diligence, transaction monitoring, blacklist filtering, changing the status of potential customers are the areas where blockchain technology plays a crucial role in managing related issues. to AML and KYC.
Customer names can be filtered 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 a regulatory technology implementation that aims to improve conventional payments linked to large card schemes using KYC data and compliance information using blockchain technology.
AML and KYC
All financial institutions are required to collect customer data such as IDs, employer data, expected business activities before doing business with them, which is part of KYC and AML compliance procedures.
Traditionally, all relevant data must be verified by independent sources and updated regularly or when planned business activities change. Manual compliance with all these procedures 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 cost-effectively.
Similarly, the identity management crisis is another issue for banks that need to be stopped and fraudulent activities prevented. Today’s 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This outdated practice can be solved with trustless blockchain technology, which allows users to securely authenticate their identity while maintaining control over their data. Additionally, blockchain can help verify the identity of a politically exposed person through biometric scanning and social media analysis.
Transaction Monitoring
The second important service offered by regtech providers is the monitoring of clients’ transactions in real time.
Machine learning and artificial intelligence technologies algorithmically observe customer behavior during transactions and develop models to alert the compliance team if they detect suspicious activity or red flags. Companies like Skry and Elliptic are developing this kind of solution.
Skry offers a data platform that offers regtech to financial services institutions and enables law enforcement to generate real-time business intelligence and risk assessments from blockchains and decentralized applications.
Elliptic is a blockchain analytics tool that provides anti-money laundering software to financial services and crypto exchanges. Additionally, law enforcement has used the company’s forensic tools to track Bitcoin terrorism financing.
Record keeping
Storing data and then retrieving it can be difficult for internal use like auditing and operational use, but not protecting it from hackers is also the top concern for financial institutions.
Despite their necessity, KYC processes are inefficient, involving time-consuming and laborious manual processes, duplication of work, and the possibility of errors.
However, with blockchain, each time a KYC transaction takes place 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 until at some level. Unlike a bank or financial accounting system, the general ledger is distributed to all computers in the chain rather than being centralized.
A blockchain KYC utility could also provide authorities with a clearer understanding of how users were onboarded and how the underlying KYC information was applied. Companies like PeerNova monitor data quality and manage exceptions in financial institutions’ internal and external data sources.
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