Blockchain to Optimize and Secure Client Data Information – Part 2by Sacha Huber June 17, 2016
Blockchain application in financial data and compliance
Blockchain makes the top secured financial transactions controllable
The financial services industry is another major area in which client information must be securely protected to prevent market manipulation. At the same time, however, compliance divisions must be aware of the identity of trading counterparties in order to mitigate potential money-laundering activity. As such, a system which balances both compliance requirements and trading anonymity is required.
Indeed, regulators may find the anonymity of blockchain a challenge to wholly approve, as it makes it difficult for them to conduct their ‘know your customer’ (KYC) checks to prevent money laundering. Blockchain’s close association with Bitcoin, moreover, hasn’t helped matters, especially as the cryptocurrency has been notoriously used in criminal activity, and even funding for terrorist activity.
Blockchain offers solutions to AML
In November, Israeli start-up Polycoin showcased its blockchain-based compliance service, which will provide a verification system for financial transactions. This will help compliance officers to handle their anti-money laundering (AML) and KYC requirements. Polycoin’s platform scrutinizes financial transactions to try and identify who they are from, and they are then placed into a ranking system. Those transactions deemed as being suspicious – such as an AML breach – will be identified by Polycoin’s platform, which will then send an alert to compliance for further investigation.
Polycoin CEO Alfred Shaffir thinks his firm can provide a complete solution for blockchain compliance, and considers Polycoin’s innovations could have as profound an impact as digital financial crime prevention tool ‘NICE Actimize’ had in the late 1990s. As such, Shaffir is of the opinion that for any bank working with blockchain, transformation of compliance systems and procedures will be their first priority.
Indeed, banks have already responded positively to Polycoin’s proposals, with the start-up participating in the innovation accelerator project in Israel conducted by financial services giant Citi, while also being chosen as one of 10 participants out of 170 applicants for Finnish bank Nordea’s accelerator in Helsinki. Shaffir has stated that Polycoin has received much interest from those banks that are interested in integrating blockchain into their businesses in the future.
Blockchain compliance specialist Tradle is simplifying the KYC process even further. Last August saw London’s Startupbootcamp FinTech accelerator take place, where Tradle CEO Gene Vayngrib explained how blockchain technology could ease the costly pain of compliance for banks. The company is creating a user-friendly smartphone interface that will allow documentation to be sent electronically, thus eliminating the need for inefficient paper-based communication. Furthermore, within each bank currently, separate KYC checks are conducted across products, divisions, locations and subsidiaries – this lack of sharing elevates KYC costs unnecessarily.
Vayngrib instead proposes a blockchain-based app called Trust in Motion which stores KYC data on a permitted ledger and which all authorized parties can access when required. He calls it the Instagram for KYC, as clients can snap a picture of their ID documents (their passport, for example) and send it directly to the bank. Once the compliance officer verifies the pictures using authentication processes, the documents are digitally signed and put onto the blockchain which, assuming the appropriate authorizations have been granted, can be co-managed by the bank and the client for updates and reverifications.
Blockchain automates AML procedures
The technology could also be extended to include AML rules, whereby instead of having to prove to regulators that AML checks have been conducted by sending them mounds of data, automatic procedures can be established that perform AML duties such as the reporting of suspicious transactions. According to Vayngrib, the blockchain method wholly preserves the privacy of the data, while the regulator “could get information about suspicious transactions without banks sharing a lot of raw, private data with them”.
While regulators will like the fact that blockchain’s verification process involves a network of users providing authentication and security, bankers on the other hand will not like this lack of privacy, particularly when it comes to sensitive trading data. Furthermore, financial institutions (and other companies) have suffered numerous data breaches in recent years that have cost them dearly.
Even if several banks are operating on a shared private ledger (with only a limited number of network users), each bank will still want to keep data from every other user in the network. Banks are extremely secretive about the business they transact, as well as the clients with whom they conduct business, meaning that this information can’t be disclosed to competitors, even on a private blockchain.