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Comments (0) Analytics, Blockchain, Government activities, Security

Could Regulators perform AML in a Blockchain World?

Money Laundering. Hanging $100 bills

By Hari Subramanian for Finextra

Before you say “that is a crazy idea”, stop and think. It sounded crazy to me as well but after some thinking I have concluded that it has merits. Here’s why. 

First, let’s check the state of technology advancements. Real time networks provide central banks the ability to settle mass market retail transactions in real time (not just the old RTGS high value payments which are typically lower in volume). In fact, in the NPP scheme, the Australian Central Bank is planning to provide just that – real time settlement of every transaction so there is no counterparty risk. This means that scalable technologies for real time intervention by central agencies when needed exist.

As part of the technology, consider blockchain – it provides a unique capability for miners to intervene, examine/ verify transactions through some protocol and then agree on valid transactions through some consensus mechanism. This again shows that blockchain can be used to examine, review, and approve transactions in (near) real time.

Second, let’s look at the business costs of compliance. In general, banks spend billions of dollars on compliance (although exact number is hard to get). JP Morgan alone claims 43,000 of its ~230,000 employees are dedicated to compliance. Citigroup claims 23,000 compliance officers. For 2017 alone, AML budgets in banks are set to grow by $8 Billion, a CAGR of 9% (Source: WealthInsight). With increasing terrorism and financial authorities catching only 1% of the $1 – 2 Trillion money laundered globally, you wonder why is no one thinking of a better way to do AML and transaction screening? It is mostly risk avoidance – if the banks are doing it already why should anyone else touch it. However this poses a major burden for banks and some lateral thinking is required.

Here’s the crazy idea – in a world leveraging blockchains and real time networks for payments, why can’t regulators themselves perform AML? Banks could still onboard customers and perform KYC checks. But when transactions are generated, the appropriate regulator (may be OFAC for USA) could perform all sanction screening, BSA/ AML checks on behalf of botht the ODFI and RDFI acting as a miner in the blockchain network. If central bank of Australia can settle all transactions in real time under NPP, I am sure any regulator could mine, verify, and clear payment transactions for AML in blockchain networks.

Impact? Huge cost savings as well as reduction in complexity for banks and other financial institutions. At the very least, cost of domestic AML checks for a transaction should come down by 50% as there is one regulator checking for both ODFI and RDFI. In the case of cross border payments, even though 2 regulators are performing AML at originating and receiving countries, when a central agency can perform AML on behalf of all banks in that country can lead to tremendous cost savings. Another top challenge for banks is finding good compliance talent. Instead of all banks, if only few regulatory agencies have to find that talent, it should be definitely easier to handle.

So what’s the next step? Banks should lobby Governments and regulators on the idea. That’s the hard part where it can get stuck. I can think of a lot of parties who would prefer status quo in spite of the complexity and increase in compliance costs. But technology is all about disruption, isn’t it? It could happen one day, you never know….

“Only one who attempts the absurd is capable of achieving the impossible.” – Miguel de Unamuno, 1905 (incorrectly attributed to Albert Einstein by some)

First appeared at Finextra

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