Blockchain and the Future of Compliance
At a recent conference of the high-tech industry, an IBM representative provided a fascinating presentation on blockchain technology and the application to compliance programs. It was a fascinating presentation. Maybe I cam coming to the party relatively late, but blockchain technology, as it gain acceptance in the marketplace, could have a real significant impact on compliance functions.
Aside from compliance applications, blockchain could have significant benefits in financial services, capital markets, supply chain management, trade management and a number of other applications where secure and transparent transactions could be recorded in secure blockchain environments.
The key to blockchain is creating a secure environment among multiple actors in which the actors can record events and transactions in real time in shared ledgers. These ledgers are immutable, meaning they cannot be modified, and secure from potential hacking or modification.
Blockchain users can receive real-time reports of activities without having to rely on post hoc reports. As a consequence, a specific user can flag potential red flags early, almost in real time, when events occur based on specific settings they establish for monitoring blockchain events.
IBM is devoting significant efforts to developing blockchain applications that are useful for a variety of business purposes. A company interacts with a number of businesses, including banks, suppliers, vendors, distributors, manufacturers and a host of other companies. A secure ledger available to each business and restricted to the specific interactions with each other creates numerous possibilities for real-time recording of transactions consistent with established rules among the participant companies.
A key aspect of blockchain is the immutability of information – companies cannot modify an entry; a new entry has to be made relating to the prior entry.
In the compliance area, a company could maintain immutable records of its due diligence process for a specific third party or a specific regulatory requirement. Due diligence delays would be eliminated by providing immediate and real-time and immediate access to the data, collection of information from potential third parties, and analysis of the information. A compliance officer could expedite the entire verification and validation process.
Compliance officers would have real-time access to a variety of business functions for monitoring processes. Proactive monitoring functions could become the new trend in the compliance arena. Regulators could then gain access to such information to verify compliance with a specific regulatory requirement. An audit trail, for example, could be preserved, accessible and immutable.
One other key application of blockchain technology is smart contracts. If a company develops custom contract programs to run on blockchain, a custom contract can update the blockchain in accordance with the contract rules. Instead of hiring an intermediary to perform certain functions, the company can retain control of a function and perform certain actions when a triggering event occurs.
Blockchain requires participation in a defined environment. Like any type of network service that requires a certain number of participants to create the network, blockchain will not gain acceptance until required number of participants have joined a specific defined environment. The interesting issue will be how quickly blockchain and its applications will be accepted. As more companies find ways to implement blockchain technology, the cost of blockchain services will decrease and the use will expand.