How Blockchain Can Help Solve Global Regulatory Challenges: Analysis
Blockchain can provide a means of cost-effectively producing and sharing information to regulators while reducing the burden of “report exhaustion.”
In today’s world, talk abounds about the ever-increasing regulatory hurdles every modern global industry now faces.
The way to address any risk is to impose more and more regulations on an industry to ensure the sins of the past are not repeated, and politicians can best show the electorate concrete steps in legislation they have developed to prevent future disasters.
The burden of regulations
The issue currently facing businesses is the ever-increasing burden of regulations responsible for driving up costs.
The Commerce Department’s Bureau of Economic Analysis has determined regulatory costs of $1.9 tln amounting to 10 percent of the US gross domestic product, which was estimated for 2016 at more than $18.8 tln.
Additionally, if one considers all costs of federal regulation and intervention flowing all the way down to households, US households would pay 21 percent of the average income – or $14,809 annually – in a regulatory hidden tax, according to the Competitive Enterprise Institute.
Previously, these regulations were limited by the counterweight of global competition and the need to be price competitive at a country level.
The reality today is that we live in a global economy and pervasive standards are set in industries regardless of where a company operates.
Failing to comply with these standards and regulations alienates a company from the global economy – giving a strong economic rationale to participate in these standards and regulatory activities.
Reducing the cost of compliance
How can we reduce the burden and cost of compliance? And how can we be transparent to an increasingly global regulatory environment?
If you produce drugs, for example, you need to comply with US FDA regulations and pass regular audits to access the marketplace.
If you trade in US currency, even if it’s with only one financial US branch, then you need to comply globally with US financial regulations.
If you plan to sell anything to an EU citizen, then you must comply with the upcoming General Data Protection Regulation (GDPR) standards (even if you don’t have operations in the EU).
To comply with regulations, you need to prove you have done the right thing in implementing them while providing a clear audit trail to auditors.
Increasingly, these auditors are transnational; you need to provide information to them in a defined standardized format on a regular basis. This drives the need to put in place processes to repeat this operation and seriously look at how these processes can be automated as much as possible.
The Blockchain as a solution
One solution is the Blockchain, which can provide a means of cost-effectively producing and sharing this information to regulators while reducing the burden of “report exhaustion” many organizations find themselves currently facing.
The two key properties the Blockchain can address include provenance of assets and chain of custody for operations on assets.
The provenance of an asset is a critical activity in most industries. An asset can be represented in digital form.
However, that form needs to be unique, and have the properties of whomever created it, where and when it was created. Checks also need to be conducted to ensure the asset is genuine.
Call it a “Know Your Asset” process. Without this, it is possible to place “counterfeit” assets on a Blockchain.
Identity and access management standards
Chain of custody is a vital reporting element. Documenting what activities have been done by which parties when is a key requirement. Some industries are further advanced than others because of existing regulatory requirements.
However, the direction of travel is to implement this across all industries to provide a distributed tamper proof ledger of activities performed on digital assets.
All of this relies on identity and access management standards, which are currently being worked upon by most government bodies. Universal standards are yet to evolve. However, in a permissioned private Blockchain, these standards can be set and achieved.
The Blockchain, with its global reach, immutability and enforcement of such key protocols as no double spend of an asset enables an auditable, real time record designed to be inspected by a regulator no matter where on the planet they physically reside.
The cost advantage for businesses is that the reports then become the domain of the regulators. The meta data provided about the assets and processes are baked into business as usual and enable ever-increasing automation as part of any business process.
After all, when was the last time a regulator removed a regulatory reporting rule?
You may wonder, what is the missing piece to this approach? The answer is acceptance of the Blockchain by regulators as an automated reporting platform and the adoption of global standards.
Considering the entire process of reporting to regulators is due for a major overhaul, Blockchain can prove essential in providing a mutually beneficial solution for all parties, including US taxpayers.
- By Stephen Holmes
Stephen Holmes is Vice President of VirtusaPolaris‘ FinTech Lab, where he investigates the application of core technologies in solving current digital banking challenges, including Blockchain technologies and smart contracts.