The Revolution of Blockchain and Compliance (Part I of II)
I am not one to engage in hyperbole. But when it comes to blockchain technology and the implications for our economy, this is going to be the real deal. In the world of ethics and compliance, blockchain has many possible applications that could easily transform compliance capabilities.
To show my age, let’s go back into time and remember when we all were buying personal computers — not laptops, but personal computers. Bill Gates, the head of Microsoft, predicted that computing power would eventually move from laptops to the Internet and mobile devices. In our short lifetime, we have witnessed the transformation of the computer industry from clunky personal computers in our home to cloud computing and rapid-fire access on our mobile phones.
I would suggest that the advent of blockchain will be just as revolutionary a new technology. Our economy is built on intermediaries that perform a variety of functions that can be replaced through peer-to-peer trustless systems. As blockchain grows, the role and need for intermediaries will decline.
We often hear the term these days – disruptive economies. Marketplace innovation occurs so rapidly that we no longer characterize technologies as mature or maturing – new technologies disrupt to the point of making “old” technologies archaic in short periods of time.
In the compliance space, we hear often hear about “regtech,” meaning a new technology that solves regulatory and compliance requirements for financial businesses operating in digital markets. Consumers have become digitally savvy and now demand rapid new technologies in the financial space. Regtech has developed to meet the need for compliance while offering innovative products to these savvy consumers.
Financial businesses are under pressure to onboard a customer quickly, screen them and their transactions for AML compliance and satisfy the need for customers to engage in markets without any significant delay. Financial firms are embracing a number of new technologies to meet consumer demand – data analytics, cloud computing, machine learning and blockchain.
Blockchain’s potential, however, is not limited to the financial industry. To the contrary, blockchain will revolutionize ethics and compliance programs.
Let’s start with a basic understanding of distributed ledger technologies (“DLT”).
A distributed ledger is a database that is shared among multiple sites, locations and institutions. A DLT can be restricted to intra-company locations or it can be permissioned as needed to include business partners (e.g. accounting firm). Those permissioned to access the blockchain can search the database, examine specific transactions, and “add” to the blockchain by making a new entry. A user, however, cannot amend, delete or otherwise modify an existing blockchain database. Every participant has access to an identical copy of the DLT. When a new transaction is added, everyone verifies the transaction, reaches a consensus, and then the blockchain is amended with the new transaction. It is a shared ledger that is immutable and accessible to all users on a real-time basis.
The real-world application of blockchain will increase efficiency and accuracy of an infinite number of functions. Blockchain can automate processes that often take days or weeks. Blockchain automates and verifies trust – there is no need for a third-party intermediary who has to conduct transactions (e.g. banks, accountants, auditors). The distributed ledger provides access to all transactions and therefore is trustworthy. Transactions can be completed quickly and with lower costs. All permitted users wherever located will gain access to the same data.
As a consequence, data can be recorded and made available in near real-time. An authorized user will not have to undergo verification his or her identity because the individual’s information will already exist in an encrypted, secure tamper-resistant database. The bottom line is that a blockchain database will be immutable, immediate and transparent.