Blockchain technology has the potential to impact many different aspects of the world’s financial system, but regulators are mainly interested in using these new protocols for improved transparency. Central banks and financial regulatory bodies all over the world are looking at how they can use blockchain technology to lower costs for compliance and offer a clear picture of how money moves throughout the economy.
A Previous Misconception
When the concept of using blockchains to move money between financial institutions first started to gain traction, there were many critics who argued this technology would make it harder for regulators to do their jobs due to the removal of the third parties from settlements and transactions. In reality, blockchain technology improves the ability for regulators to track movements of funds because the level of privacy offered by these systems is flexible.
Blockchains used for internal purposes can be made private and secure, but regulators can also be provided with keys to unlock data behind specific transactions whenever necessary. In fact, some blockchains can be made completely public, which means the data can be tracked by regulators in real time.
What are the Benefits of Blockchain Technology for Compliance?
There are two main benefits of blockchain technology in the area of regulatory compliance: improved transparency and lower costs.
Increased transparency through the use of a blockchain is made possible by the fact that the ledger of who owns what is managed by multiple parties. This means all participants on a blockchain can see the complete record of transactions; however, they may not know who is behind each transaction by default for privacy and security reasons. With everyone having a copy of the same ledger, it makes it impossible to go back in time to change one’s accounting records. This weakens the ability for a financial institution to lie or cheat during an audit. Changes to the history of the ledger must be agreed upon by all participants (or at least a majority) on the blockchain, so they do not go unnoticed.
Regulators are also able to keep their own copy of a blockchain, which lowers the cost of compliance overall. Blockchain technology essentially automates the compliance monitoring process by creating an open audit trail that can be access by regulators with a few clicks of a button.
Governments Creating New Blockchain Initiatives
The idea of regulators using blockchains to improve transparency in financial markets is not theoretical. There are many governments around the world already researching this technology, with Hong Kong being one of the most recent jurisdictions interested in these concepts. The 2016-2017 Hong Kong budget outlines the need to explore blockchain technology for reducing suspicious transactions and bringing down transaction costs.
Regulatory frameworks for blockchain technology are still in development in most parts of the world, but it’s clear this is not an innovation that regulators are looking to prevent from blossoming over the next decade. The future of this technology has looked much brighter since governments realized they can also benefit from its use in the global financial system.
This is an opinion article by Kyle Torpey. Views expressed in opinion articles do not necessarily reflect the views of BTL.