As cryptocurrencies and blockchain technology become more and more popular daily, financial regulatory agencies are also trying to keep abreast of developments in these areas and manage them in a way that complies with regulations. Regtech (regulation technology) is a technological sub-sector that follows the developments in these areas and supports the business in accordance with the regulations in these areas.
Although there are difficulties in implementing Regtech software, it saves time and money on a large scale. In addition, it can ensure that regulatory changes are tracked and that the platform's technology stack remains compliant. Many Fintech platforms are adopting Regtech solutions that leverage blockchain to improve KYC and AML processes. Cryptocurrency firms can also use it to streamline the process of meeting AML compliance regulations.
What is RegTech?
With the complexity of legal regulations, privatized technologies in this field came into play, and all of these technologies were gathered under the RegTech heading. RegTech is a sector that offers technological solutions to the challenges faced by companies arising from the economy and legislation.
Regtech covers regulation technology, and this technology aims to improve the process of fulfilling regulations. Regtech covers the regulations and rules that apply when placing a product or service on the market. The purpose of this technology is to maintain market order and protect consumer rights.
Regtech can be used in a variety of fields. For example, the management of financial transactions. Regtech software automatically scans financial transactions and checks whether these transactions comply with their regulations. This way, the speed of financial transactions increases, and the error rate is reduced. It can be used in the financial sector and in many areas, such as healthcare, customs, and trade.
RegTech, which makes compliance more efficient, encompasses digital solutions such as artificial intelligence, machine learning, and big data. But it's not just the rapid development of innovation that is driving the rise of RegTech. The second pillar of its success is the cost of compliance, which places a heavy burden on the cost of doing business.
How Does Blockchain Work in Banking?
Blockchain is a data structure that allows data to be stored and distributed securely. It consists of a chain in which many small pieces of data are connected to each other. These pieces of data are used to record transactions, and each piece of data contains information from previous shards. In this way, it becomes very difficult to change or delete blockchain data, and the security of this data is ensured.
Blockchain technology was first used for cryptocurrencies, but over time, this technology has started to be used in other areas. For example, this technology helps track the source of agricultural products in the agricultural sector, while in the healthcare sector, it also helps to store patient data securely.
In traditional banking, some procedures can be time-consuming and costly. Blockchain offers solutions to many of these procedural problems. Members of the European Payments Council said that blockchain technology in legal compliance will fundamentally change business by 2025.
Blockchain technology provides its users with advantages such as ensuring transparency of their operations, offering cross-border transactions in real-time, and enabling faster processing of payments. Using blockchain, a system that provides real-time access to data, can save the time and labor required to confirm transactions and complete complex procedures.
A bank can make money transfers to its customers via blockchain, allowing them to be carried out more quickly and securely. It can also be automated to execute repetitive processes by making intelligent contracts with blockchain.
Thanks to blockchain technology, banks can store customer data more securely and prevent this data from being altered. This helps banks obtain information for different due diligence processes without needing a third party. In addition, the information stored is immutable, and the network is kept accurate and up-to-date in case of any changes to the essential information.
Regtech and Cryptocurrency: How Blockchain Affects the RegTech Ecosystem
Blockchain has many advantages to drive the RegTech revolution: decentralization, increased translucency, brisk and more cost-effective processing, and enhanced security through cryptography. Financial regulators and service providers are looking for the best cost-effective solution to help financial institutions comply with the rules. AML experts can take their automation further with blockchain technology. İt is disrupting traditional ways of doing business thanks to its cost-effectiveness and many other advantages mentioned above.
1. Anti Money Laundering (AML) and Know Your Customers (KYC)
Financial institutions must collect customer data before conducting business as part of their AML and KYC compliance processes. Data must be verified and kept up to date. In addition, manual operations are time-consuming and costly.
Current KYC systems often rely on third-party verification of user identity, which introduces another risk. With a blockchain-based system, the data received can be compared with current data, and smart contracts can be executed automatically and verified in near real time. It also helps authenticate people with political influence through blockchain, biometric analytics, and social media analytics.
2. Transaction Monitoring and Screening
The ability to monitor and scan customers' transactions offered by regtech providers has become beneficial for fintechs. Rule sets are created to catch possible financial crimes, and then they are run in real-time to alert the compliance team to find any suspicious activity or red flags.
Considering the increasing use of virtual currencies, blockchain can be used to increase the speed and security of automated transaction monitoring in virtual currency use cases. Blockchain offers better trace traceability, and faster analysis can be achieved.
3. Record Storage
The main problem that Big Data brings is that it creates underutilized, unstructured data. Storing and retrieving data can be challenging for audit and operational uses. In addition, increased vulnerability against hackers is another concern.
Blockchain technology allows cryptocurrency companies to access secure and up-to-date information in real time. This way, quick access to the necessary data and records to complete all processes in compliance with regulations can be provided.
4. Regulatory Fund Management
Another excellent example of the implementation of blockchain technology is the tokenization of assets in the fund sector. It provides significant advantages for real-time fulfillment of the Fund's regulatory obligations and reporting.
5. Fraud Prevention
While Regtech is often associated with AML compliance, it also helps prevent fraud. Fintechs have stepped up their fraud prevention strategies by using regtech. Data blocks are encrypted with cryptography to prevent fraudsters from accessing sensitive data. So, we see that blockchain takes fraud prevention with cryptography a step further. Blockchain requires complete data matches from block to block, so fraud experts can configure their systems to receive alerts when synthetic artifacts are used for account creation or transaction. This can prevent scammers from stealing or manipulating information from crypto users.
The bottom line
The five use cases described above are just a glimpse into the position of blockchain technology in the regtech space, the potential of which doesn't stop there. Using Regtech software helps companies stay on top of their AML compliance. Sanction Scanner provides solutions to improve your KYC and AML compliance procedures. Request a demo to find out how we can help you meet legal requirements.