Even as the value of bitcoin plunged from a high of $20,000 in late 2017 to about $4,000 in late February 2019, according to Bloomberg, interest in the technology behind it grew. Blockchain, the distributed ledger technology used in bitcoin, has the potential to aid compliance in significant ways.
Digital distributed ledgers are databases of transactions that can be shared among participants and protected from hacking by cryptography. Any changes to a transaction can be limited to authorized parties. The identity of the parties and changes made to any transaction are immutably recorded and viewable to all parties in the chain. Because of that, distributed ledger technology can identify—even prevent—tampering, fraud, and corruption. This can benefit both regulators and the regulated.
National governments are starting to use blockchain to secure records. Sweden, Georgia, and Ukraine are using it for real estate transactions and land registries. The state of Delaware allows corporations to use blockchain for the registration and transfer of stock ownership.
The technology can also help companies meet increasing government requirements aimed at combatting money laundering and terrorist financing. These include know-your-customer provisions, which require banks to collect information on customers to identify potential criminal actors. That can be complex and expensive for companies, and frustrating for customers.
Often, customers have to submit the same information to multiple banks involved in a transaction. Each bank individually encrypts that information to ensure data security and is not able to share it with transaction partners.
Pilot projects are underway. In May 2018, the banks HSBC and ING used blockchain to execute a transaction for a shipment of soybeans for Cargill. Because all parties were on the same blockchain platform, they were able to link and replicate records securely and maintain a tamper-proof audit trail.
Meanwhile, UBS has launched a pilot to meet the European Union’s Markets in Financial Instruments directive and rules. Banks that are on the Ethereum-based blockchain will be able to cross-reference data on legal entities.
Companies could also use blockchain to audit the origin of goods. The Drug Supply Chain Security Act of 2013 requires pharmaceutical companies and their partners to closely track shipments. By 2020, pharmacies and hospitals must be able to verify that drugs they dispense came from legitimate suppliers. Pfizer and other pharmaceutical companies are testing blockchain to track movements of drugs through their supply chains. The Food and Drug Administration announced in February 2019 that it was launching a pilot project to study new ways to secure the supply chain, including blockchain.
U.S. regulators are interested in how distributed ledgers can improve monitoring. Speaking at a conference at Georgetown University last fall, the chairman of the Commodity Futures Trading Commission talked about blockchain’s potential. Regulations could be digitized and compliance built into companies’ operations through smart contracts, J. Christopher Giancarlo said. CFTC computers could then transmit regulatory requirements and automatically receive compliance data from businesses.
Through such a system, eventually the majority of standard tasks associated with compliance could be managed by machines, Giancarlo said.
For further information, please contact:
Stuart Baxter, Regional Director, Operations & Client Services, Epiq