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How Blockchain Can Help Reduce Money Laundering


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Over the years, innovations in finance and technology have collectively increased the pace and ease with which money travels around the globe. While this has facilitated business operations and our day-to-day lives, it has also deepened the reach of dirty money into the system, making the task of tracking money laundering more difficult and costly.

It is estimated that global money laundering transactions are 2-5% of the global GDP, or roughly $1-2 trillion annually while only less than 1% of global illicit financial flows are currently seized by authorities, as per a report from United Nation’s Office on Drug and Crime.

Governments and regulators around the world have placed complex procedures and stringent laws to curb money laundering, but its clandestine nature has only added to more money being spent on compliance procedures rather than stopping money laundering in the first place. One effective and crucial step towards slowing money laundering is the verification of identity, or what we call Know Your Customer (KYC).

A study by Burton-Taylor International Consulting LLC notes, “Spending on financial data has flattened out for traditional credit-risk purposes but overall spending reached $21.1 billion globally as fast-growing anti-money laundering and fraud prevention needs paced overall growth of 5.69%.”

According to Thomson Reuters, “Parallel surveys show differing perspectives of financial institutions and their corporate customers on the effect of financial firms’ spend of up to $500 million annually on KYC globally.”

In recent years, issues such as rising costs (high compliance costs as well large penalties and regulatory fines), transaction delays, integrated data management, privacy laws, constantly evolving regulations, and the absence of a single KYC system for multiple lines of businesses have challenged the efficiency of the KYC system while turning it into a financial strain for financial institutions and banks.

Blockchain To the Rescue?

The blockchain technology, which has the ability to share immutable records across the network in near real-time in a secure manner, is being experimented on by fintech start-ups and established technology companies for use in KYC procedures. The use of blockchain can reduce compliance errors and remove the duplication of effort involved in validation of documents.

According to a Deloitte report, “Blockchain would also be of use in identifying entities attempting to create fraudulent histories. Subject to the provisions of data protection regulation, the data within it could even be analyzed by the banks to spot irregularities or foul play – directly targeting criminal activity.”

A white paper by Tata Consultancy Services says, “KYC is an apt candidate for the use of blockchain technology, as it results in significant reduction in of the time, cost, and effort involved in KYC validation.”

It is estimated that blockchain-based solutions will substantially reduce processing costs as the infrastructure cost for building them will be just one-fifth of the current KYC processing costs.

Projects Underway

IBM  (IBM) has recently announced a blockchain project with Singapore fintech start-up KYCK! to enable financial institutions to enhance their customer on-boarding process (KYC) by reducing the time and expenses involved.

In September, Synechron announced the launch of its Blockchain Accelerator Program that includes “creating a centralized KYC utility model allowing utilities to differentiate themselves and enhance anti-money laundering and credit controls.”

In April, ConsenSys introduced the Proof of Physical Address -- a smart oracle developed for the Ethereum blockchain to serve as a primitive form of KYC. Oracles are specialized, trusted entities which perform certain computations or execute codes.

In January, Algorythmix  was named the most transformative use of blockchain in Citi Mobile Challenge APAC 2015, for Cetas which is the decentralized KYC and credit rating framework. Cetas allows sharing of complex identity and reputation system processes with credit rating across various cross-industry organizations.

Start-up KYC-Chain is working on enhanced KYC on blockchain technology. It calls itself “the ultimate banking compliance platform” built over blockchain.

Then there is Tradle’s KYC network which allows banks to share data with the help of the blockchain which makes the KYC process highly auditable.

These, and many other start-ups, are working in the field of identification and authentication by use of blockchain.

Final Word

A blockchain-based registry will reduce the burden of KYC compliance and penalties on banks and other financial institutions while facilitating client verification details across the network in a secure and seamless manner. Overall, the blockchain technology has the potential to improve compliance, reduce costs, and enhance efficiency and speed while strengthening anti-money laundering standards in the financial system.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: News Headlines , Technology , Blockchain



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