As blockchain technologies move towards mainstream adoption, there is huge potential for financial firms to realize their benefits in guarding financial transaction data against hackers.
But blockchain has other wide-ranging applications, including anti-money laundering (AML) compliance. For instance, regulated entitles can record on-chain when their business verification checks are performed, who performed them, and what the results were. They will have this immutable process log available on demand, which simplifies both internal and external compliance audits as records can be shared easily and instantly between relevant parties. This ultimately allows regulators and other participants to review the record at will, speeding up transactions and the audit process.
Blockchain also makes your record of KYC and KYB checks unalterable, due to the immutable structure of the underlying distributed ledger technology.
Financial firms can find themselves overwhelmed by the potential complexity of blockchain. But the idea behind it is simple. A blockchain is simply a ledger, the kind held by millions of users, companies, government agencies and other entities to keep their records. But with blockchain, there can be one single ledger which is distributed, meaning it is contributed to by many people and yet transactions recorded on the ledger itself are unchangeable and immutable. This offers transparency without the need to trust a third party to maintain the ledger. In turn, this means that blockchain is a much faster way of storing and accessing data than any traditional system could ever be.
The concept was initially proposed around 1991, but the first blockchain network was not implemented until 2009 when a developer using the pseudonym Satoshi Nakamoto created a public ledger for transactions using the cryptocurrency Bitcoin. The concept grew rapidly from there, and now has a wide range of applications in financial services and beyond.
The blockchain technology market has tremendous potential and is set to reach $1.4 trillion by 2030, according to a recent report by Research and Markets.
One of the many benefits of blockchain technologies is that they prevent domination by a single computer or group. This makes blockchain almost impossible to alter or hack because the hacker must change every block in the chain across all distributed versions. You can also use blockchain for any assets that traditionally need third-party verification, reducing friction, complexity and cost.
Over time, refined validation mechanisms have allowed blockchains to mitigate many modern security risks. Refinements include proof of stake – a consensus mechanism used to confirm transactions and create new blocks through randomly selected validators; and proof of work, which verifies the accuracy of any transactions based on computational power required.
And by securely automating processes - such as transaction settlements, verifications, or document transfers - blockchain technology provides a low-cost and low-maintenance alternative to many financial systems.
Blockchain technologies have also become increasingly valuable for audit and KYC compliance. They can store a range of information - such as inventory, identification, and legal contracts - in a secure, traceable, and verifiable system. This provides a robust audit trail that includes immutable records of due diligence tasks, procedures, and shared documents.
Blockchain technology also supports compliance automation by providing clean, accessible, real-time data. For example, instead of asking people and third parties for their bank statements or other records, reviewers and auditors can verify transactions on blockchain records instantly, without contacting intermediaries.
You can also configure automation around your risk policies and compliance requirements - for example, setting it to block suspicious transactions.
Asset managers face challenges in improving risk management, cutting costs, and keeping up with the increasing volume and complexity of regulation. Blockchain technology can assist by automating fund launches, administration, and transfers; digitizing holdings for wider market access and liquidity; and customizing privacy settings for transactional confidentiality.
It also allows you to program voting and other shareholder rights and obligations into assets, reducing human error and improving governance and transparency.
Global payments are traditionally executed by intermediaries. This adds layers of cost and time to transaction settlements. Blockchain can streamline payment and remittance processes, significantly cutting settlement times and costs.
According to Juniper Research, blockchain will enable banks to save $27 billion on cross-border settlement transactions by 2030, reducing costs by 11%.
Blockchain technology also enables digitization of AML data, such as KYC and transaction histories, helping reduce fraud risks and enabling real-time authentication. And it supports automation of regulatory oversight and auditing.
Many banking transactions still rely on traditional execution processes with long lead-in times, including for information verification, credit scoring, loan processing and fund distribution. Blockchain can streamline these services, reduce counterparty risk, and decrease issuance and settlement times.
Blockchain technologies can also streamline credit prediction and scoring markets by instantaneously informing about user activity and sanctioning data across a network. These technologies allow authenticated documentation and KYC/AML data, reducing operational risks and enabling real-time document verification.
Insurance claims are vulnerable to fraud, and claim assessments can be lengthy. Blockchain can securely streamline:
These streamlining methods reduce processing times significantly.
Blockchain technologies can automate claims processing by using smart contracts. And they can support parametric insurance, which pays out on a specific trigger, such as flooding in a particular area. Parametric cover can significantly improve traditional insurers’ underwriting models, enabling much faster pay-outs; transparent, undisputable criteria; and potentially cheaper premiums. It could also reduce the need for traditional broker relationships.
Insurance firms face a huge challenge in keeping up with the pace and complexity of regulatory change. Blockchain allows documentation and KYC/AML data authentication, reducing fraud risk and facilitating claim assessment. It also facilitates regulatory oversight, and reduces manual errors.
Identity verification is a key component of KYC across industries, but it can be a barrier for the approximately 1 billion people worldwide who do not have official proof of identity. This limits their access to public services, voting, and economic participation.
Digital identity on the blockchain is an innovative solution to verifying personal identifying information (PII) without physical identification. Users would be able to verify their identities without physical IDs by using a private key connected to their digital identity, allowing them to take back control of their identity if their physical ID documents are unavailable.
It also can improve the ease of KYC checks. Concerns surrounding falsified identity documents could be drastically reduced or eliminated by embracing blockchain-based digital identity verification.
Using blockchain technologies for AML compliance can bring huge benefits, but you need an expert partner to help you maximize these advantages.
KYB onchain is a blockchain solution from Kompany, a Moody’s Analytics company. The service is based on a decentralized ledger, so you don’t need to store entity identity information in a data center. Entity checks are recorded on the chain for internal or regulatory audits in order to meet perpetual KYB requirements. This creates a secure, immutable, legally admissible audit trail of entity verification and KYB data throughout the customer lifecycle.
KYB onchain is designed with compliance in mind, and combines our unrivalled access to primary source company data with the immutability of blockchain for audit-proof business verification.
For more information about Moody’s Analytics KYC and KYB solutions, contact us to schedule a demonstration.