Regulators have not always keen on blockchain technology, but lately they have started to seeing its potential benefits. A Hong Kong regulator has indicated how the blockchain can help financial institutions to overcome money laundering.
The essential traits of blockchain technology make it a robust solution to fight money laundering. Not only is a blockchain transparent, but it also prevents duplicate transactions, and it can reduce the risk of fraud.
Hong Kong market regulator Benedicte Nolens feels this technology should be used to comply with AML and KYC regulations, rather than be subjected to it. Nolens explains:
I do think quite obviously KYC, and AML stands out there as a pretty significant inefficiency and problem case. If you start tallying up the fines, that banks have been subjected to globally for this field, you’re into the 10 billions or more of US dollars.
The big question then becomes how the blockchain will be used to address money laundering. Complying with KYC and AML regulation via this technology can result in error reduction through automation. Additionally, a record for all checks carried out per individual client can be stored on the distributed ledger.
Ending Money Laundering with Distributed Ledgers
Whether or not financial institutions will jump on Bitcoin technology all of a sudden, remains to be seen, though.
There are no specific regulatory guidelines for this technology in Hong Kong, which makes financial players wary of dealing with it.
Nolens affirmed that argument by saying banks should ensure any use of the technology complies with the rules. Moreover, it takes time to implement a blockchain-based solution into the existing bank infrastructure. It is very well possible it will take several more years before blockchain is being adopted.
Then again, Nolens feels the financial areas not entrenched in back offices may be the first key areas to embrace distributed ledgers.
Considering there are various initiatives underway to bring blockchain technology to the financial sector, it is pertinent these efforts start delivering. There are no short-term gains where the blockchain is concerned, but given the amount of funding flowing to these startups, a prototype can’t be delayed forever.
An Open Blockchain is Required
But there is another reason as to why startups tackling the financial ecosystem are not succeeding.
Private blockchain solutions will not work, nor will their permissioned counterparts. Immutability is a fundamental component of preventing money laundering, and only the open blockchain can provide that trait.
This leaves financial institutions with two choices as far as using a blockchain-based solution is concerned: Bitcoin or Ethereum.
Neither of these cryptocurrencies is popular among bankers since they cannot exert control over them. Nor can they control an open blockchain, yet they can build new applications and services on top of one. Addressing money laundering with distributed ledgers will require an open solution, with additional privacy-centric features.
What are your thoughts on using the blockchain as a tool to combat money laundering? Let us know in the comments below!
Images courtesy of Benedicte Nolens, Shutterstock.