Amid the surging demand for the Blockchain technology, the Hong Kong Monetary Authority (HKMA) warns banks and financial institutions that the implementation of decentralized Blockchain networks may increase money laundering risks, creating an ideal environment for the emergence of criminal activities and illicit transactions.
Most of the world’s leading banks and financial institutions are attempting to integrate the Blockchain technology into their existing systems. Its mining-based network and decentralized nature enables firms to store and transfer monetary data instantaneously with low fees.
The mechanism of utilizing a shared network amongst both administrators and users allows the settlement of money in real time, allowing banks to process cross-border payments in a more cost-efficient and secure manner.
However, the HKMA states that the anonymous and decentralized characteristics of the Blockchain technology may lead banks into conflicts with financial regulations and KYC policies, particularly if banks are not able to manipulate and control the transactions.
Issues with decentralized Blockchains
Banks and financial institutions have been struggling to find a way to implement the Blockchain technology, primarily due to various financial regulations.
By default, banks are not permitted to integrate decentralized networks, as law enforcement and authorities would not be able to control the network and its settlements. Thus, the only method of integrating the Blockchain technology is by creating a permissioned ledger, or a controllable ledger, that is centralized and grants a certain level of control to network administrators.
While the idea of creating a centralized Blockchain network seems simple in theory, mathematically and systematically, it will pose an enormous security threat to the bank’s IT infrastructure.
Thus, the question comes down to:
Do banks continue their attempt to integrate a permissioned Blockchain network? Or do banks attempt to integrate distributed ledgers in spite of regulatory frameworks?
Conflicts with regulations
As the HKMA states, regulators will not allow the integration of decentralized networks. If they did permit it, banks would have already demonstrated commercial use-cases of the Blockchain technology.
HK central bank’s Executive Director Shu Pui Li stated:
“[Blockchain offers] good potential, but a lot of things need to be addressed. The most painful issue is legal. A lot of legal issues.”
With global budget for Blockchain development surpassing the $1 bln mark, Li believes that banks and financial institutions must be more cautious in approaching the Blockchain technology.
There exists an important reason behind the increasing investment in the Blockchain market and that is the desperate effort of banks to prove the applicability of the Blockchain technology.
However, because of regulatory frameworks and security issues, neither decentralized Blockchains and permissioned networks can be integrated.
“Be prudent, don’t get too excited,” Li said.
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