Many business processes are still largely paper-based, relying on spreadsheets and physical documents. Data can be hard to track and exchange across multiple parties. Harnessing blockchain to greatly reduce transaction time and improve cross-organisational workflows and processes is the way forward.

That’s the view of Patrick Manasse, chief compliance officer and a co-founder at MonetaGo, the fintech pioneering a new era of fraud detection and prevention across financial services, using blockchain. He is also a trained attorney and prior to MonetaGo, was at boutique US law firm Guzov Ofsink.

Here, Manasse discusses the potential of regtech to help financial institutions move forward.

Patrick ManasseScrutiny over the practice and frameworks surrounding financial institutions has grown significantly and the role of the regulator has in turn increased. From the financial crisis of 2007, prompting the introduction of Basel III, to the recent Anti-Money Laundering Act of 2020 in the US, regulatory measures today are a direct product of the financial services that they govern. However, the role and tools of the regulator has not undergone much change over the course of the past decade.

Navigating the regulatory environment

Despite financial institutions across most jurisdictions abiding by heavily regulated environments, the regulations themselves face perennial challenges – both in application and efficacy. While many of these challenges are inevitable due to the complex, competitive financial landscapes they seek to govern, the cumbersome processes that burden regulators and financial institutions could like so many other things be digitised.

The shortcomings of these processes lead directly to increased time spent navigating unwieldly processes and that means increased cost. It is estimated that most of the financial industry spends $181billion annually maintaining compliance. Regulatory change was cited as the top compliance challenge for 2020.(1)

Although we have seen vast uptake in digitisation in recent years, the truth is that for the most part, businesses continue to abide by legacy processes – and that often means relying on data entry or sometimes even on paper.

Regtech – regulation technology – has in recent years emerged as a possible solution to overhaul this complex landscape. It is a colleague to fintech, which has become a ubiquitous term for the intersection between finance and technology. The two can work hand in hand to ensure the application new technologies bring to financial services are also seen in regulation.

Choosing a technology fit for purpose

Regtech covers a broad scope of digital application. At the most basic level, it can mean using Excel to log data where previously recorded on paper. This may seem like a very rudimentary application – and it is – but that goes a long way to demonstrate just how antiquated many regulatory processes are. This same truth unfortunately extends also to much of the gamut of financial services.

Yet, regulators face a specific set of challenges that could benefit hugely from the right technology. Among these, distributed ledger technology (DLT) is fast emerging as the technology of choice that could provide regulators and financial institutions alike with a new set of tools to respond more quickly and effectively to regulatory and compliance measures.

By participating directly in the financial networks, be they blockchain-based or otherwise, regulators would be able to avail themselves of faster and more cost-effective processes enabled through automation. This approach can be applied to a number of use cases, including anti-money laundering (AML), know your customer (KYC), monitoring, record keeping  and various forms of reporting.

Many of the challenges these use cases face are common themes across regulatory compliance. KYC tasks, for example, are broadly repetitive processes. This can often result in data inconsistencies and duplication of processes. They also often face additional challenges, such as using different internal and external systems, meaning solutions are required to bridge operational procedures.

With a shared network, records of activity and information can become available to regulators participating in the network. This means that any issues can be communicated in real-time, greatly increasing the visibility into violations, rendering them far less likely.

In the case of blockchain, these networks would be complemented by the unique feature of immutability: once data is uploaded and shared to the ledger, it cannot be changed or deleted. This is a simple but revolutionary promise for compliance processes and a valuable tracking tool for the regulators required to have oversight of multiple steps and outputs.

Looking to a new future

Regtech has the potential to change many areas of compliance and financial institutions stand to gain the most. These obligations to comply with cumbersome AML, KYC and various other controls will only continue to increase in our interconnected world.

In addition, by freeing the hands of regulators from the administrative processes that currently take up so much time, regulators can turn their attention to more direct action. The closer that regulators are brought to acting in that capacity, the closer we get to returning them to their fundamental role: as marshals of compliance. This is a crucial and valuable role in maintaining our broader financial ecosystem and will undoubtedly be one of the hallmarks of its modernisation.

(1) Thomson Reuters ‘The Cost of Compliance’ report, 2020

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