“Exciting technology” and “Regulatory compliance” don’t initially sound like they gel. Certainly cryptocurrency and regulation haven’t always gone hand-in-hand. But blockchain, the exciting technology that underpins cryptocurrencies, does have a place in compliance, logging data in secure, verifiable databases.
What is blockchain?
First up, let’s start with the obvious question - what is blockchain? It is a type of programmable, encrypted, and distributed ledger technology (DLT). Basically, blockchain logs transactions that take place using cryptocurrencies.
To help create a picture of how it works, imagine that it is a little like old fashioned bookkeeping that noted incoming and outgoing money. Instead, these transactions are taking place across computer networks and the currency in question is crypto. The thing about blockchain is, it tracks and logs transactions while being impossible to edit.
The concept of a blockchain was introduced in the nineties but widespread application began in 2008, spearheaded by the people behind one of the biggest names in crypto - Bitcoin.
Blockchain and crypto
And what's crypto? Well, cryptocurrency is a digital currency, and a medium of exchange for that currency, which uses encryption to control its creation and verify its transfer. Crypto is decentralized, meaning it sits outside any central banking system or fiat currency like the dollar or euro. The benefits of using it include increased transparency, cost reductions, and accurate tracking.
Almost all cryptocurrencies are now secured via a blockchain network. Blockchain makes it possible for cryptocurrencies to operate without the need for an intermediary like a bank or credit card company. Therefore payments are likely to be more secure than ordinary debit and credit card transactions.
As mentioned, blockchain is difficult, if not impossible, to alter or hack because to corrupt a blockchain system a fraudster would have to change every single block in the chain, across all its distributed versions. By its nature blockchain has been designed to prevent network domination by a single computer or group, and this is what makes it so hard to break.
Blockchain can also be used for bonds, stocks, and other crypto assets for which records need to be stored digitally and which have traditionally relied on a trusted third party to provide verification.
How does blockchain support compliance?
As the technology that underpins cryptocurrency, blockchain has become increasingly useful as a tool in audit and therefore compliance. It’s able to contain a range of information - as well as transactions - such as legal contracts, ID, or product inventories. Blockchain entries are secure, traceable, and verifiable, which means they can provide a robust audit trail that includes records of procedures, tasks, and shared documents. Blockchain data is resistant to modification and this makes it reliable in any review or due diligence process.
Good audit and risk management necessitates understanding, assessing, tracking, aligning, and resolving compliance issues. For this, automation has become crucial. The process automation enabled by blockchain technology results in opportunities for regulators because it provides clean, accessible, real-time data. Different institutions can rely on this data as a record of transactions that have undeniably taken place.
There’s a time saving element too – instead of asking people for their bank statements or sending requests to third parties, which could take months, auditors can almost instantly verify transactions on publicly available blockchain records without a third party intermediary.
Blockchain can also block problematic transactions from taking place unless certain conditions are met. It can be configured around risk policies and compliance requirements, and achieved through smart contracts using blockchain.
Get in touch
From fintechs to neobanks to crypto wallets, firms use PassFort technology to digitally transform their risk management and compliance processes. We create an automated workflow of compliance checks, so customers can complete KYC and AML processes, as well as risk monitoring or perpetual KYC.
Every decision is tracked in PassFort, which can be used for audit and reporting purposes, as well as ongoing improvements in operational efficiency and customer experience. If you’re creating digital compliance journeys or transforming your existing compliance processes, please get in touch - we would love to help.