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Regulators & banks looking at how blockchain could improve compliance efficiency

Major banks are aiming to use blockchain applications to comply more effectively with regulations such as the European Union’s General Data Protection Regulation (GDPR), and to reduce costs and simplify work processes, officials said.

Speaking at the recent Sibos banking conference in London, a panel of bank executives said as blockchain technology had matured, regulators and the industry have become increasingly interested in finding specific uses where such innovation could improve regulatory compliance.

Unlike the public type of blockchain commonly associated with cryptocurrencies such as Bitcoin, bank and technology consortia such as R3 have focused on the development of compliance applications based on private, “permissioned” blockchains. In a permissioned blockchain, the group decides who can view the audit trail information on the blockchain.

An audience poll at the conference revealed information-sharing and know-your-customer (KYC) challenges were the top areas in which attendees believed blockchain technology could play a role in improving existing processes.

Panelist Valérie Villafranca, head of KYC transformation program at Société Générale, said the bank was part of the R3 consortium that had been developing a KYC utility that would allow members to share information using blockchain. “We looked into how can we facilitate document-sharing between different clients and different banks by using just a vault which is a blockchain node where clients would put a document and enable access to the document on a case-by-case basis to any member of the blockchain that would request it,” Villafranca said. “What makes it different is that it is both useful for internal and external use. This dramatically lowers the threshold in terms of in terms of use.”

The cost of compliance was another of the main reasons for blockchain adoption, in addition to factors such as problems with legacy systems and shrinking margins and cost pressure.

She said the utility, which had met with support from the European Central Bank, as well as regulators in France and Germany, was in the final stages of testing and could be finalized this year. “KYC is a huge cost driver for every bank,” she said. “[The utility] doesn’t solve it all but it facilitates it. …[It] is a process that is much easier to track from a compliance perspective, with full traceability and GDPR [compliance] by design, which is also a huge issue because we have documents circulating between banks that are very private. When you need to gather them all it quickly becomes a nightmare.”

GDPR compliance was at the top of the wish list from a regulatory perspective, said panelist Isabelle Corbett, head of regulatory affairs and govtech at R3. “The solutions in this space are being designed with regulation in mind so they are not being built and then being deployed blindly — instead it is ongoing conversations with regulators, it is looking at where it’s going to be deployed, and what laws apply,” she said. “There are regions where regulators are actually driving and really demanding these solutions because they want a new KYC solution that is reliable, and so they’re telling those in their jurisdiction to use blockchain for KYC.”

The cost of compliance was another of the main reasons for blockchain adoption, in addition to factors such as problems with legacy systems and shrinking margins and cost pressure, Corbett said.

Saving money

Regulators were not opposed to the industry saving money but rather wanted banks to adopt new forms of technology that were transparent and could make difficult tasks such as sanctions compliance more effective, said panelist Alma Angotti, managing director and cohead of global investigations and compliance practice at Navigant.

Another panelist, Umar Farooq, head of digital treasury services and head of blockchain at J.P. Morgan, said banks might think they could save money by adopting blockchain solutions but might end up paying more and getting additional capabilities that could be a competitive advantage. “I feel [it’s] like 20 years ago, when you paid $2 per minute to call international, while now it’s like zero but your phone bill is still much higher now than what it used to be for your old landline,” he said.

SocGen’s Villafranca said it was not so much about the cost as it was about improving efficiency and correcting previous processes.

Corbett said R3’s Corda platform had built-in regulator nodes (access points to information) to let regulators see what was happening and what was being shared between banks on the platform. “We grew up in a regulated space, our banks are all highly regulated, and so one of the first questions when R3 started was how to make sure regulators are involved,” she said. “That regulator node, which is an observer node, means that they can actually see what is happening, and the information… really excites regulators.”

Interestingly, regulators did not necessarily want all the information available to them, she said. “They do not want all of the information possible flooding into their doors,” Corbett explained. “They don’t want to be held accountable for this world of information that they can’t digest and that doesn’t help them,” she said. “The regulator nodes that we have on Corda can tailor the information that regulators get.”

This article was written by Trond Vagen, a Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence.

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