SUMMARY
Navigating regulation is a difficult task for financial institutions because new and revised policies are constantly on legislative agendas
Blockchain technology, which enables counterparties to effectively and accurately record immutable states, is a novel solution for compliance challenges
A blockchain compliance solution addresses more than one regulation. Since the solution is architectural, it can easily accommodate new regulations
Despite stringent policies, the financial services industry still has instances of regulatory oversight. The financial services industry is also under pressure, with many new policies mandating that more data be reported in less time. Firms must learn the stipulations of each new piece of legislation and develop a compliance solution before the date of enforcement, which is when compliance is enforced and penalties for non-compliance are imposed.
Navigating regulation is a difficult task for financial institutions because new and revised policies are constantly on legislative agendas. As many financial institutions have global reach with multiple product offerings, they may face compliance with over 400 regulatory and rule-making entities. As a result, many financial institutions find it challenging to meet the rising demands from numerous regulators in various jurisdictions.
Aside from the sheer volume of incoming financial policy, legislation frequently contains requirements that significantly evolve from the draft stage to final rulemaking, causing firms to postpone critical decisions on how to implement compliance solutions. The proposed draft can be quite different from the final rule as revision stages and responses to consultation papers prompt changes to address industry concerns.
Financial institutions are scrambling to meet the final requirements as enactment day approaches. Firms that are short on time typically resort to interim solutions. Such solutions are frequently expensive and additional systems are layered on top of pre-existing ones, resulting in a tangled web of integration. Despite being implemented with the intention of increasing automation in the compliance process, solutions still necessitate extensive manual reconciliation work. Furthermore, interim solutions may only meet the requirements of a single incoming regulation; thus, a new regulatory regime may necessitate a plethora of interim solutions.
Compliance systems struggle to quickly adapt as new regulations typically call for more reporting data. A compliance software solution must attempt a firm-wide integration of various, disconnected data streams to comprehensively record and aggregate reporting metrics. Effective data integration has historically been difficult to implement for all types of enterprise systems, let alone a compliance system.
The challenge of data consolidation then accounts for a significant portion of compliance work. Current compliance systems necessitate laborious data management processes to ensure that all information is accounted for and accurate. Data from multiple trading systems and data warehouses across multiple asset classes must be consolidated, validated, re-formatted, stored internally, and reported in the format required by regulatory authorities for each transaction.
How Blockchain Can Prove To Be An Effective Solution
Blockchain technology, which enables counterparties to effectively and accurately record immutable states, is a novel solution for compliance challenges. Data must pass through multiple internal and external systems and checkpoints during any transaction for reconciliation and accuracy. The transfer of this type of data, known as immutable states, among parties is a core competency of blockchain.
Blockchain architecture also allows each party to have a complete view of the data about all of their transactions. This is due to consensus mechanisms that require all parties involved to digitally sign states on the ledger before they can be validated and notarized. All transactions must pass through the counterparties’ respective nodes, and the final state of each is stored in the vault database of the node. Vaults keep track of every transaction that a company is involved in or has access to.
Blockchain architectures’ fundamental properties have the potential to provide a comprehensive solution for regulatory reporting. Furthermore, data stored on a blockchain can be easily reported to regulators. In contrast to large data stores, relevant information contained within a state does not need to be converted into multiple formats and transferred multiple times to be consolidated. After a transaction has been verified and stored in the vault, all participants can be confident that the information is correct and will remain so in perpetuity. No reconciliation processes are required.
There is then a comprehensive source for retrieving information from the vault for regulatory reporting purposes. A blockchain compliance solution addresses more than one regulation. Since the solution is architectural, it can easily accommodate new regulations. Since the reporting data is consolidated within a vault, new regulatory reporting requirements need only be added to the list of information pulled from the vault.
Solving Compliance-Related Challenges
Firms’ current fragmented compliance systems can only accommodate new regulations by adding additional layers of services and software to an already cumbersome, monolithic system. The existing internal systems are inefficient and incomplete, resulting in larger data silos and more questions about the accuracy of information.
Many of the current regulatory compliance challenges may be addressed by a blockchain solution. The immutability and accuracy of such data eliminate the need for manual reconciliation processes. Blockchain’s inherent data integration capabilities provide an adaptable mechanism for dealing with future regulatory and reporting requirements. Third-party service providers may eventually be obsolete.
Due to the inertia of overhauling existing systems, implementing a blockchain solely for regulatory reporting appears unlikely. A blockchain solution for regulatory reporting, on the other hand, strengthens the case for implementing the technology. Other synergies from capital market assets placed on a blockchain will almost certainly be required for large financial institutions to fully embrace blockchain.
