Blockchain Enabled Augmented Data Reporting


The common thread between all of the above mentioned projects is that every regulated financial firm is required to submit data to regulators through regulatory reports. Governments provide the instructions for how financial compliance reports should be built and delivered. 

The amount of money services business regulation and regulatory reporting has increased significantly in the decade since the financial crisis. Given this increase in reporting and regulation, the complexity and time it takes firms to manage regulatory reporting has also grown.

Financial firms provide regulators with reports defined in regulation, but regulators also make ad hoc data requests for financial data in the form of audits. Fincen requires united states based financial institutions to run independent audits to ensure data accuracy over time. A prototype DLT system may reduce duplicate data storage and associated costs for running audits on historical transactional data potentially reducing some data security risks by eliminating erroneous data transfers between firms and regulators when it comes to archived information.

Any KYC data used to generate the compliance reports or fiscal audits would remain with the firms while a trustless record of transactions could be linked to the banks historical transactional ledger with ease. This means that not only the augmented compliance report would be shared with the regulator, but the information attached to each interaction with the dataset as well.

By making financial data available on demand, fiscal regulators may also store less data in their own digital systems, helping regulatory IT budgets reduce strain on the departments who are tasked with maintaining financial trust, but are restricted to the amount of information they can securely process due to human capital costs. Finally, by executing standardized UBL code within financial firms own digital infrastructures, the fluidity of data, as well as the transparency, is potentially increased while reducing the friction of sharing financial information associated with past processes.

More than a few retail banks are dipping their toes in the blockchain pool based on those proposed savings. Santander, a major EU financial entity for example, worked with California-based Fintech Ripple in 2018 to launch the first blockchain-based money transfer service focused in the global remittance market.  This ties to one of the proposed use cases of digital assets, helping reduce the friction associated with cash moving around global markets, while promoting the use of digital applications to track the customer information associated with the movement of those funds.Still, for the retail banking industry to move forward at scale, further proof of value will likely be required.

More validations of distributed ledger technology are seen with each passing day. While we have passively identified three major pain points when it comes to dealing with high risk financial marketplaces— know-your-customer/ID fraud, internal costs of financial compliance, and risk management scoring— more proof in the cost saving potential of all  

Know-your-customer protocols are critical tools in the battle against fraud, which is a significant and growing challenge. Banks lose $15 billion to $20 billion annually from identity fraud alone.

A related issue is money laundering. A report estimates that global anti-money laundering (AML) spending alone exceeded $8 billion in 2017, up 36 percent from 2013. AML headcount increased as much as tenfold at major US banks over the past five years.

Retail banks have made significant efforts to combat fraud, protect data, and prevent money laundering, investing in automation and standardization, introducing real-time information sharing, and building predictive models. Blockchain enables these systems in new and exciting ways.

These distributed ledger technology initiatives have increased efficiency do have significant upside potential but have also led to longer on-boarding times for clients interested in the technology as government regulatory clarification lags behind. 

Between that and higher costs, reflecting the significant operating model changes and manual effort required to adjust to new methods around blockchain. Automation and machine learning may be a potential solution. For example, onboarding or account opening can be done by referencing image based identification, cell-phones can help to physically or digitally sign transactions across the world. 

Blockchain-based technology enables physical and digital customers to have their interactions with a financial network securely tracked and near immutably recorded in the form of a digital identity which may be attached to the financial engagement they perform. Similar to how an actual physical fingerprint can be used as a unique identifier to see what a person has touched in the physical world, a digital fingerprint should be established to see how entities touch digital information, especially when it comes to digital transactions.

This data can be safely stored on a distributed ledger and have a verifiable receipt of any reference by any bank in the network. The owner of the digital fingerprint can use it to submit new account applications and prove her identity universally. They could decide which entities can access their data similar to a license model.

In this new system the decentralized blockchain structure eliminates overlapping KYC and AML compliance checks by helping standardize the language in which banks share digital identity authentication information. The on-boarding of a customer need only be done once by use of existing technologies such as mobile phones, fingerprint scanners, and facial recognition technology. 

Augmenting Compliance Auditing

We’ve discussed how distributed ledger technology can help augment the way financial institutions access data already stored on their own ledgers, and how standardizing how that information is communicated can act as an additional form of due diligence in future filings or audits.

An additional benefit of blockchain is its basis in encryption which ensures that an entity on the network has access only to the information to which it is entitled. Even if a customer’s file is meant to be transparent, a log should be kept both as to when the change was made and by whom which can be referenced by validators on that network. Transaction audits and compliance surveillance can also be automated more fully when a standardized methodology is agreed upon.

Benefits of the distributed ledger architecture included the ability to provide a secure channel to send codified regulations to multiple firms, to provide a single source of truth for a shared set of facts and a consistent environment that ensured the code ran successfully.

Blockchain technology could bring value in core parts of the digital and retail banking business models. However, retail banks have been slow to engage new firms to build open source and shared solutions, opting for more traditional, internally optimized traditional software solutions. The future of distributed ledger technology faces challenges in terms of scaling, the volatility of digital assets which currently are used to track engagements with distributed systems , and trusting the framework in which information can be shared without giving up competitive advantage.