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Blockchain in Compliance: 6 Possible Use Cases

  • 3 December 2018
  • Sam Mire

Regulatory compliance is an aspect of most professional industries, and though it can be costly and time-consuming, it is important for ensuring that wide-scale crises are averted and individual institutions maintain the most basic adherence to industry rules. According to a Deloitte report, the changing business landscape, which has been referred to as The Fourth Industrial Revolution, has more than 1,600 surveyed executives concerned with two primary considerations: new business or delivery models and changing regulatory environments.

Ironically — considering that we are detailing how blockchain can assist in compliance — it is the emergence of new technologies, and the inability of regulators to keep pace with the speed of innovation, that concerns many executives. The emergence of legal and regulatory grey areas is understandably worrisome. Forbes has some suggestions for how businesses can maintain compliance in the changing era, including maintaining flexible governance strategies; anticipating changes in the laws and how they affect the workforce; maintaining stores of information and analysis that could be of use to regulators and the companies themselves; and remembering that regulation is an ever-moving target.

Considering these modern regulatory challenges, businesses need all the help they have available to stay within the legal bounds, and blockchain technology can be used as an addendum to these best practices within the vast realm of compliance.

Blockchain in compliance - Practical use cases


Providing Immutable Records for Regulators

Blockchain use cases in regulatory compliance - Immutable Records for Regulators

Despite more stringent regulations that arose from the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in July 2010, fraud is still rampant in several sectors, finance among them. Because of the complexity involved with attempting to perpetrate a fraud successfully, most fraud cases involve senior management. 50% of those involved in detected fraud cases were vice presidents, managers, or supervisors, and that’s partly because owners of information — such as those in positions of power at a company — often have complete control over that information. The consolidation of information in a few hands makes it more likely that the temptation of illicit alteration of figures will occur — and, as history has shown, it will occur.

Cases of fraud investigated by the IRS in 2017 include the owner of a roast beef shop skimming $6 million, with the help of his wife and son; a former NFL player sentenced for participating in a Ponzi scheme and money laundering; and a former manager at HBO embezzling from a cable company. These schemes were outed, but far more go undetected due to clever accounting practices and data manipulation.

With the blockchain, regulators can be fairly certain that figures haven’t been hacked up, whittled away at, and manipulated to paint a false portrait of a company’s financials. While this calls for some degree of honesty when data is being input into the system by the companies themselves, a connected platform by which regulators can view real-time updates would significantly reduce lags in reporting that often provide time for data to be manipulated. These immutable records will be game changers in the ease of administration and quality of regulatory oversight and compliance.

Companies Trying to Solve This Problem


Greater Customer Oversight

Blockchain use cases in regulatory compliance - Information Oversight

Industries where regulation is necessary are often rife with risk for customers — and unfortunately, this reality tends only to come into light when a massive failure of oversight results in catastrophe. Economist Joseph Stiglitz of Columbia University has called The Federal Reserve “derelict” for not completely understanding credit default swaps, which played a substantial role in the housing crisis and Recession of 2008-9; and, to be fair, if the Fed didn’t completely understand such an impactful economic tool, then how could the public be expected to?

But 2008-9 was far from the only time when a lack of competent regulation came back to bite consumers harder than any other segment of the population. In 2007, The Consumer Product Safety Commission issued recalls for 473 products, many of which had come in from Chinese importers uninspected. These imports included toxic toys that exposed the obvious holes in customs oversight. This complete bungling of basic inspection processes is listed among the 31 most visible failures of government between 2001 and 2014.

The ability for customers of a given organization to be privy to red flags that arise when regulators discover questionable practices or all-out negligence would be a boon for consumer protection. While this may not be completely plausible from legal and practical standpoints, those companies willing to maintain a level of transparency with customers regarding their compliance record could do so using a blockchain ledger, by which the data and information remains safely contained but easily viewable. 


Real-Time Regulatory Oversight

Blockchain use cases in regulatory compliance - Real-Time Regulatory Oversight

The cost of oversight is immense, and much of that cost can be attributed to recordkeeping that is required by oversight systems that lack the ability for immediacy. As it stands, it’s a “damned if you do, damned if you don’t” scenario, as the potential cost of not keeping thorough records is inarguably greater than the real cost associated with maintaining and storing compliance-mandated records.

When Coca-Cola Bottling in Mobile, AL was sued in 2010 after being accused of discriminatory hiring practices, The U.S. Equal Employment Opportunity Commission requested that the company produce employment applications dating back to 2010. Because Coca-Cola Bottling couldn’t produce those records and therefore prove that they had not chosen a less qualified male applicant over the rejected female applicant who was suing them, the company was slapped with a bevy of mandates and was also required to pay the plaintiff $35,000. Some may say that the cost of keeping even rejected applications for years is unreasonable, but in the world we live in, compliance is a necessary evil that all businesses must learn to accept, not fight against.

By utilizing blockchain’s decentralized ledger technology, a single record can be made available to both regulators and businesses, with updates registering in real time. This means real-time monitoring that reduces the cost of time lags, allows inconsistencies and red flags to be spotted sooner, and reduces the expense of maintaining large stores of both paper and digital records.

Companies Trying to Solve This Problem

  • Elliptic – Tracking crypto crime in partnership with Law Enforcement agencies.
  • Symbiont Blockchain tracked securities compliance. 

Better Client Onboarding Systems

Blockchain use cases in regulatory compliance - Client Onboarding Systems

The client onboarding process, especially for heavily-regulated financial institutions, is burdensome, both in terms of the resources it expends and the time it requires. Know Your Client (KYC) and Anti-Money Laundering (AML) processes are the most prominent hurdles to taking on a new client, and they alone can take several months to complete. There’s a reason why legacy processes are so financially and temporally draining: they’re outdated. According to a 2013 survey of 500 U.S.-based financial advisors, more than one-third relied upon “filling out paperwork by hand to be their primary method of opening [new] accounts.”

This process has also proven far from effective in avoiding behaviors and practices that result in massive fines. Between 2010 and 2016, more than 12 major banks doing business globally were hit with combined penalties totaling more than $15 billion due to violation of AML and KYC requirements, according to KPMG. As forward-looking advisory firms such as PricewaterhouseCoopers detail in their reports, the blockchain could serve a central role in evolving client onboarding processes, to the benefit of financial institutions and regulators alike.

With blockchain, the future of onboarding seems much simpler. With a database of verified client data in existence, secured and shareable among different institutions, the time it currently takes to collect and authenticate data would be reduced significantly. Further, changes to a client’s status could be updated to the entire network of institutions with near immediacy, reducing the “I didn’t know” defense for those who choose to ignore warnings that, say, their client has been associated with cartel activity. This would clear many of the expenses for financial institutions, as well as minimize the ambiguity that currently complicates and lends opacity to the client onboarding and monitoring processes.

Companies Trying to Solve This Problem

  • Norbloc  Blockchain powered KYC automation.
  • Deloitte – KYC as a service, managed KYC offering
  • KYC Chain – KYC platform on the blockchain.
  • Tradle – Blockchain driven KYC service. 

Proof of Process

Blockchain use cases in regulatory compliance - Proof of Process

Proof of process is a fairly broad term, but it is critical to effective oversight and regulation. Essentially, it means proving that the numbers are truly what they appear to be through the deconstruction of the processes used to get to that outcome. When notorious Ponzi schemer Bernie Madoff was exposed for having squandered approximately $20 billion in investors’ funds, some experts were not surprised in the least. In fact, Massachusetts-based fund manager Harry Markopolos had been calling for years for the SEC to investigate Madoff’s constantly rising returns. Markopolos had run the financials time and again, and as a quantitative financials specialist, he knew one thing for certain: Madoff’s purported proof of process was not proof of anything besides a near-certain Ponzi scheme. While the evidence was there in the case of Madoff, and simply was ignored by many regulatory officials unqualified to crunch the numbers, creating a clear record of unmanipulated facts and figures is a critical step in proving that processes of financial institutions are free of fraud and deception.

The blockchain’s specialty is the ability to provide a step-by-step accounting of transactions, chains of custody, etc. The immutability of the record, when implemented in a way that ensures the inputs are legitimate, provides regulators with unprecedented tools to prove that accounting processes are sound, and that the figures being reported are up to snuff, avoiding the catastrophes that arise from the actions of the Madoffs and Enrons of the world.

Companies Trying to Solve This Problem

  • Coinfirm – Immutable record of blockchain transactions.
  • QRC Group Compliance for blockchain organizations.
  • CodeLegit – Ensuring tech follows compliance regulations. 

Unassailable Records of Ownership and Chain of Custody

Blockchain use cases in regulatory compliance - Proof of Ownership - Chain of Custody

Establishing ownership of assets, both digital and physical, is a lesser-talked-about aspect of compliance that permeates numerous industries. In manufacturing, as one example, adherence to regulatory standards is key to avoiding injury, slowdowns, and related financial losses. U.S. companies pay roughly $62 billion per year due to workplace injuries, and while much of this cost is likely unavoidable, stronger systems ensuring compliance in all aspects of a business’ operations can only help reduce avoidable workplace mishaps.

Like most industries, the cost of compliance in an industry like manufacturing is high; in fact, it’s estimated to run manufacturers an estimated sum of $192 billion per year to comply with the economic, environmental, and workplace safety regulations. Having already paid such a steep, recurring price, those in compliance-heavy industries may as well explore how emerging technologies could help lower the cost of doing business while easing the burden of complying with regulation.

In terms of complying with regulators, the blockchain can also help establish that parts are being acquired from legal suppliers, and that practices are being carried out in accordance with industry standards. The blockchain has also proven itself as a means to document the exchange of ownership; this is the basis for transactions involving the transfer of cryptocurrency from one individual to another. This could also be the case with physical and digital assets — from land titles to money, machinery and beyond — in order to prove to regulators and other compliance officials that transactions are being done above-board.

Companies Trying to Solve This Problem

  • Cambridge Blockchain  Keeping organizations compliant while using customer data.
  • HyperProof  Blockchain based compliance solutions, preventing fraud.
  • LogSentinel – Using blockchain to secure data and prevent compliance violations resulting from breaches.
About Sam Mire

Data journalist and market research analyst focused on emerging technology, trends, and ideas.

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