In a blockchain world, will governments and regulators take over from banks in enforcing AML regulations?

When you think “this idea is crazy”, you should stop and think carefully about whether it is really true. When I heard about blockchain, I thought it was crazy, but after thinking about it carefully, I found that this technology does have many advantages. Here are the reasons.

First, let’s look at the current state of technology. Real-time networks provide central banks with the ability to settle mass-market retail transactions in real time. In fact, the Reserve Bank of Australia is planning to provide this real-time transaction settlement service under the New Payments Platform (NPP) program, which would avoid counterparty risk. This means that certain scalable technologies could allow central banks to intervene in real time when needed.

Blockchain technology provides miners with a unique ability to intervene, check/validate transactions through certain protocols, and then reach agreement on whether the transaction is valid through some consensus mechanism. This once again shows that blockchain can be used to check, review and approve transactions in real time.

Second, let’s look at the cost of corporate compliance. Generally speaking, banks spend billions of dollars per year on compliance (exact figures are hard to come by). JPMorgan Chase claims that they have nearly 43,000 of their 230,000 employees dedicated to compliance. Citigroup claims that they have 23,000 compliance staff. By 2017, bank AML budgets are expected to grow by $8 billion, a compound annual growth rate of 9% (source: WealthInsight). With terrorist financing rampant and financial authorities only catching 1% of the $10,000-20,000 laundered money globally, you might wonder why no one has come up with a better way to AML and transaction screening? The reason is mainly risk aversion - if banks are already responsible for AML, why should anyone else do it? This means that all AML responsibilities are placed on the shoulders of banks, which can be a huge burden for banks, so we need some lateral thinking.

Here’s a crazy idea – in a world where payments are made using blockchain and real-time networks, why don’t regulators enforce AML themselves? Banks can still perform KYC checks on their customers. But when transactions are generated, some appropriate regulator (such as OFAC) can perform all sanctions screening, BSA/AML checks, acting as a miner in the blockchain network. If the RBA can settle all transactions in real-time in the NPP program, I’m sure all regulators can mine, verify and clear payment transactions in the blockchain network, thereby enforcing AML.

What impact will this have? Banks and other financial institutions can expect significant cost and complexity savings. At a minimum, the cost of AML checks on domestic transactions should fall by 50%. In the cross-border payments space, while there are already two regulators enforcing AML between the source and recipient countries, significant cost savings can be realized when a central authority can enforce AML on behalf of all banks. Another top challenge facing banks is finding good compliance talent. The talent issue will also be much simpler if, instead of all banks enforcing AML, only a few regulators need to find such talent.

So what’s next? Banking institutions should lobby governments and regulators to accept the idea of ​​sharing the burden of enforcing AML regulations. This will be very difficult to do and it is likely that we will get stuck here. I can imagine that some institutions may prefer to maintain the status quo, even if the compliance costs and complexity increase. But new technology exists to disrupt old technology, right? Maybe one day it will happen, but you never know when...

“Only those who dare to attempt the absurd can achieve the impossible. - Miguel de Unamuno, famous philosopher”