By Tom Spouse, 12 November 2018
I’ve noticed a trend in our business around Financial Crime, AML & KYC in which a lot of research surrounds the use of AI and Blockchain as potential solutions to mitigate risk exposure.
Most would agree that KYC represents one of the greatest potential business areas to benefit from AI & Distributed Ledger Technologies (DLTs) such as Blockchain. However, these technologies create as many challenges as they provide solutions. Data privacy, governance, and compliance requirements over a decentralized system are enormous challenges which keeps many of us up at night.
A blockchain technology provider and Prospect 33 partner, BTL Group , have a very interesting DLT platform called Interbit. Their extraordinary solution to the problem is megachain technology. We are very interested in the model they have created. In essence, the solution that BTL has piloted is to create an environment in which many connected blockchains can be utilized while keeping information in isolated blockchains which are not shared with unconnected participants. It is an interesting solution and certainly gets around the issues associated with data security and compliance.
Regardless of whether megachain is the final solution to data compliance, someone will crack this nut soon. When that happens, DLTs will inevitably transform the entire process of KYC.
I have spent a lot of time researching the use of DLTs in the Capital Market space. Over the past year, I, like many, have started to see a path for how DLTs are best utilized. When we first set out looking at this, most people assumed that DLTs would hail a dawn of a new era, in which financial systems would need to be scrapped and rewritten using DLTs.
Now, with the benefit of experience with dozens of POCs, it appears that there is another more likely path that DLT adoption will take. By using DLTs as an addition to our existing infrastructure, we can very rapidly adopt their benefits without the costs and disruptive need to replace much of our core and existing system.
The most obvious example of how this could be achieved is in the trade matching processes. The fundamental principle of Consensus is, of course, the perfect mechanism for matching transactions, it was, after all, designed for just this purpose!
This process currently occupies huge manual resources within the Financial Services industry, and most notably within the Capital Markets space. Trade matching and any other reconciliations are necessary for controlling our business both between and within organizations.
The opportunity that exists is to bring together two transactions that continuously require reconciliation and replace this with a single immutable transaction. This can, of course, be used continuously and consistently throughout the transactions lifecycle and the infrastructure. The potential for benefit is huge. If we add a DLT on-top of much of our existing infrastructure for this purpose, it would significantly reduce the error rates and underwrite data quality.
Many of you reading this will be only too aware of the overhead reconciliation processes take. Whole teams, and indeed businesses, exist to solve this problem. The potential of DLTs offer a relatively simple, cost-effective method to perform these tasks.
Our existing infrastructure of the front, middle and back-office systems would need to change very little, but we’d soon find that we have a lot fewer breaks to deal with. The net saving to risk, compliance, and costs could be significant.
The direction taken with the Interbit platform and the advent of the megachain can enable the realization of these benefits when the many reconciliation use cases organizations require to control their business are applied. Are we now seeing one of the first real steps of the new era of technology in the Financial Services industry?
At Prospect 33, we believe this to be the case and our research team is working closely with a select number of our clients throughout the industry to help identify “quick wins” like these.
About Prospect 33: Since 2005, Prospect 33 has supported Financial Services institutions by navigating them through the continuous changes in the landscape of the industry. The company has since grown to include legal entities in Hong Kong, Singapore, Canada, Poland, the United Kingdom. Since 2005, Prospect 33 established a significant foothold in the financial services sector and has trading terms in place with numerous global financial services institutions. In New York & London, Prospect 33 has the reputation as the leading tier-2 Change Management consulting firm in the Risk & Regulatory space. In early 2018, Prospect 33 began the refocus of its core business into FinTech and transformative technologies while maintaining the emphasis on having a highly diverse workforce and developing the next generation of Prospect 33 Future Leaders™.