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Real-World Applications of Blockchain to Compliance (Part II of II)

The financial industry has embraced the future of blockchain technology.  And for good reason.  As a regulated industry that is required to provide regulators with large amounts of financial data, blockchain can make that process pain-free.

Financial institutions have to collect, organize and deliver large amounts of risk data to federal regulators.  Much of the information has been stored in “older” information technology systems and/or siloed in different systems.  Some of the process may be automated and some manual.  Regulators do not have the ability to manage these datasets and focus their review in an efficient manner, impeding their oversight and surveillance efforts.

Blockchain can solve this problem – financial institutions could share their data with regulators and eliminate the need for regulators to reconcile and aggregate the data themselves.  The blockchain consists of a documented and immutable audit trail.  Every bank and regulator would save on costs and time.

Let’s consider for a moment the impact that blockchain could have on due diligence and vendor onboarding.  Personal information could be verified and then stored on blockchain.  Such information could be subject to screening and then the results maintained on the shared ledger.  Once completed, the company would be able to rely on the existing due diligence in the database and then update it as needed for the benefit of all users.  Vendor onboarding would be conducted in the same way with a transparent and easy process.  Any repetitive task would be replaced by universal access of relevant information to all authorized users.

Blockchain has specific benefits in managing a company’s supply chain.  A distributed ledger can track items as part of a supply chain, follow the exact path of the item, and provide real-time monitoring of supply chain events.

Another aspect of blockchain holds real promise for compliance.  Given real-time recordkeeping, blockchain has the ability to embed rules into its database that can be used to monitor transactions and create real-time alerts.  With “smart contracts,” the blockchain includes rules that produce a trigger or alert for certain items.  As a consequence, the compliance and audit functions can monitor transactions as they occur and receive alerts on a real-time basis.  The implications of this for compliance and audit is significant.

Blockchain has the potential to reduce delays from satisfying compliance requirements.  A proposed transaction involving a suspected sanctioned individual could be stopped and an alert created to report the transaction.  Similarly, a proposed transaction with a third-party who has not completed due diligence could be stopped and appropriate parties notified of the proposed transaction.  In both these cases, compliance could quickly intervene and make sure that the transaction is permitted or that it is blocked.

On the financial side, real-time audits and rules can quickly identify anomalies.  Internal auditors will have a more efficient way to identify potential fraud and investigate a series of transactions using rules-based surveillance techniques.

To be sure, compliance and audit will have to develop and implement the rules, and they will have to be subject to modification as needed.  Access to the rules will be restricted.

I do not mean to suggest that blockchain as a technology is ready to go.  There are a lot of issues that are still being addressed, such as the scale of blockchain, the management of access and sharing of ledgers among entities, and potential security concerns.  These issues can be solves, and given the potential benefits on the other side of the ledger, blockchain is poised to bring immediate and significant benefits to compliance.

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1 Response

  1. August 10, 2018

    […] and compliance. In Part 1, he considers how blockchain will revolutionize compliance. In Part 2, he provides some real world […]