Why banks are running towards the blockchain
Blockchain systems are a dream come true for banks, and many of them know it.
This piece was originally published on February 19, 2018
Banks will inevitably be using blockchain technology in the future, says Kyckr CEO David Cassidy. In fact, they are already. Blockchain solutions are just one of the identity verification solutions Kyckr offers, but it's an increasingly popular option with good reason.
A light at the end of the tunnel
Banks are streamlining their systems and slimming costs across the board. As customers are pushed towards online banking with nifty incentives, systems are digitised and automated. As the physical world recedes, banks are feeling the cost benefits.
But there are two key exceptions: compliance and security.
"There's no finite view of these costs," Cassidy says. "It's an endless pool of investment."
These costs include the expenses involved in actually managing the systems as well as the penalties when they fail. Rabobank was recently fined $369 million for its role in laundering cartel money, while the largest settlements can be much higher. Britain's HSBC bank was once fined $1.9 billion for similar failures.
Meanwhile Australia's Big Four banks are estimated to move about $5 million of dirty money each day and risk finding themselves on the hook for tens of millions of dollars in penalties if their precautions are found to be inadequate.
But for the first time, blockchain systems are offering a potential light at the end of the tunnel. This is largely because the costs of compliance and security are largely focused on identity, and this is one area where blockchain systems very clearly excel. Microsoft noted this as well, opting for blockchain architecture on its ID platform. Ethereum and many others have similarly recognised ID systems as one of the main needs and applications of their networks.
Identity verification underpins KYC (Know Your Customer) laws, and an effective ID verification and management solution runs across both compliance and security, with the ability to bring enormous savings where they're needed most.
The bulk of these savings might come from the simple fact that blockchain technology could actually work, and that anti-money laundering is all about identity verification.
How money is laundered
In many cases, money laundering is deceptively easy to do and deceptively difficult for banks to realistically prevent.
For example, one launderer deposited $289,000 of drug money in two days, in lots of $9,500 at a time. It doesn't count as suspicious activity unless it's over $10,000, and so didn't trigger any warnings. It was only when a bank teller asked for his name, and he refused to answer that he was detained and the police called. After his arrest, it emerged that he'd previously been charged with money laundering offenses and released on bail with the condition that he didn't deposit more than $2,000 at once.
Other cases are more subtle. Such as the more classic technique of buying a legitimate business, changing ownership and then routing profits through that business.
Or in the case of the now-famous Bangladesh bank heist where $81 million was routed through a SWIFT correspondent bank that may not have even existed. The robbers signed up a fake bank as a correspondent in the SWIFT network. They did the paperwork, paid the fees and apparently got accepted without much oversight from SWIFT.
In all cases, proper tracking of identity is key to effectively preventing these. It might be tracking an individual's criminal record, a business's change of ownership or whether a correspondent bank on the SWIFT network has had its identity verified.
What's in a name?
Names, registration numbers, addresses both physical and digital, lists of known associates, information on a person's position within a company, legal ownership, place of origin and previous owner are all facets of identity.
Identity isn't just for people. Individuals, corporations and suitcases full of dirty money all have multiple facets to their identity. And together, they form an extremely tangled web of data that's almost impossible to accurately decipher.
There are clear advantages to being able to pick apart this web, and separate it into clean strands that show the relationships between different identities, especially for compliance and security purposes. And the blockchain is perfect for this.
Why the blockchain?
Blockchain technology might be the ideal solution because it can allow for more granular assessment of many different data points without actually revealing the information. This means banks can closely track the required information and run computations on it without taking the risks of storing the information themselves.
In the case of Kyckr, its current solutions include bitcoin, Ethereum, HyperLedger and Credits blockchain-based systems. Essentially, the location of data is stored on the blockchain rather than the data itself.
This type of decentralised storage system means data can be kept fully up to date, with discrepancies highlighted for further investigation.
The benefits of blockchain ID management systems aren't just for banks either.
"They’re charging you GST. Are they paying GST?" Cassidy asks. It's a simple question, but at the moment, most companies wouldn't be able to answer this with anything but a shrug. And a lot of banks are having trouble answering questions like "Does this company actually exist?" or "Does this person have any previous convictions for money laundering?"
These kinds of questions should be relatively easy to answer in the information age and probably will be in the near future. For banks, not having those answers can be expensive.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, NANO, SALT and BTC.