How Distributed Ledger Technologies are Enhancing Businesses to Stay Relevant in the Digital Age
“Digital/mobile wallets set to be the online payment method of choice by 2023 with 52 percent market share.” This is the future, according to the Worldpay Global Payments report.
And how can you and your business keep up? One solution is by using blockchain in RegTech solutions. It can help with transparency, monitoring, record keeping, and regulations, making everything more effective and efficient by digitalization and automation of routine compliance obligations.
Combining RegTech and blockchain can lead to many solutions and use cases. In this article, you will learn about its benefits, use cases, and major financial institutions that use RegTech and blockchain.
Blockchain and RegTech
Regulatory Technology (RegTech) earned a record $1.37 billion USD in financing in the first six months of 2018. In 2019, the technology was reaching further as more companies are stepping into digitalization to meet the next level of growth and application.
In 2020, the demand for RegTech skyrocketed because of the need to digitize quickly and adapt to shifting business and consumer demands. And this year, 2021, the market is predicted to increase because of COVID-19 and the contactless future.
Using blockchain in RegTech can support automation, streamlining AML (anti-money laundering) tests, social media, and personal biometrics for KYC (Know-Your-Customer) authentication.
Regulatory Technology (RegTech) is a cost-effective and reliable technology that helps businesses quickly respond to the pressures of increased regulatory obligations. This technology enables companies to simplify data management in the ever-evolving regulatory landscape. You could say, RegTech makes the task of complying with regulatory standards easier.
A blockchain is a digital ledger of transactions that is duplicated and distributed through the blockchain's entire network of computing systems. Each block in the chain comprises several transactions. After a new transaction on the network, a record of that transaction is added to each user’s ledger.
Benefits of the Blockchain
By using the blockchain’s power and distributed ledgers, users can quickly resolve compliance issues and easily monitor new regulations by increasing automation and implementing real-time alerts.
Because of blockchain’s transparency, it can potentially eliminate the need to keep a duplicate of records for both regulators and insurers. This will improve the speed and quality of the regulatory review process.
The cost of compliance procedures is lower because of the speed and automation. Regulators can also see any changes in compliance because all the actions are on the blockchain.
Benefits include greater transparency due to a distributed ledger, faster and cost-efficient through automation, strengthened security by using cryptography, and improved record-keeping.
Major Challenge of Blockchain
Blockchain is still a buzzword in 2021 because of its revolutionary innovations and disruptive technology that is slowly changing the world. It is one of the most powerful technologies of the twenty-first century, but its implementation is complex, resulting in gradual progress.
The technology has its own set of challenges that it needs to tackle for it to have a better adoption. One of its major issues is its scalability. For example, Visa can handle more than 2000 transactions per second without failure. But the two largest blockchain networks are lagging.
Bitcoin can do three to seven transactions per second, Ethereum can do 15 to 20 transactions. This is why using the Blockchain is unsuitable for large-scale applications.
The solution for this is Bitcoin’s Lightning Network and Ethereum’s Plasma that can handle faster transactions with low fees. The blockchain must speed up to become accepted.
RegTech businesses adopt blockchain technologies to various use cases due to the many possible advantages of blockchain technology.
Anti-Money Laundering and Know Your Customer
When it comes to use cases for blockchain applications in RegTech, the first examples are Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations for client onboarding.
Addressing this issue is a must because all financial firms need to gather their data on potential customers before they can begin doing business. And this data needs to be continuously updated.
This kind of process is time-consuming and costly in terms of both resources and money invested. A universal ledger that all banks could use to identify their clients and monitor transactions is the ideal solution. But this is difficult to attain because of the ongoing fight between various blockchain consortia trying to define universal standards.
Currently, RegTechs help cryptocurrency firms verify identity quickly and cost-effectively using advanced data analytics or biometrics while adhering to complicated regulations.
Because of blockchain’s transparency, monitoring is the second obvious use case. This use case is a good application of the technology as it can monitor transactions, especially now with the increasing usage of virtual currency and cryptocurrency. By using blockchain, it offers improved traceability and quicker research.
The third RegTech use case is record keeping. The main issue with Big Data is its large volumes of unstructured data with little use. Regtech firms that are using blockchain are aiming to address the problem at the source.
The goal is to provide transparency and a distributed ledger to use internally, documented for auditing purposes, and secured from falling into the wrong hands.
Regulatory Fund Management
Another excellent example of blockchain technology in action is asset tokenization in the fund industry. Smart contracts have an invaluable advantage due to the impact of automation. Still, they also protect essential bases for regulatory reporting and real-time compliance with a fund's regulatory obligations.
Financial Companies Using Blockchain and RegTech
Financial service providers worldwide are using blockchain and RegTech to help with their compliances. Here are five major companies in the world reaping their benefits.
Bank of America Merrill Lynch
Bank of America Merrill Lynch (BOFAML) has a patent when it comes to cryptocurrency and blockchain. The patent is about how companies can store cryptocurrency data. Its blockchain patent represents the company’s efforts to get ready for future growth.
BOFAML also established a three-part customer system, with the first part containing customer accounts and the other two parts containing accounts owned by businesses.
Commonwealth Bank of Australia
For Australia's universal Disability Insurance Scheme, the Commonwealth Bank of Australia partnered with the government-run technology innovation center DATA61 to conduct a trial of a blockchain-powered smart money system.
DATA61 is a division of the Commonwealth Scientific and Industrial Research Organisation that researches major local businesses.
The largest private bank in Brazil collaborated with the Standard Chartered Bank of the United Kingdom to develop blockchain-based solutions for small business loans. After being tested in the real world of real data, this project passed with flying colors.
This Japanese bank has created a new blockchain-based cross-carrier mobile payment service. This product was developed in collaboration with Synchronoss Technologies.
Blockchain is slowly driving the RegTech revolution. With the current demand for speed, information, and security, technology is constantly evolving and will prevail in the end.
It will continuously develop a better transparent relationship between business and customer, customer experience, AML/KYC compliance, risk assessment, and digital identity verification, which is exactly what we need for the digital age.