How does Regulatory Technology work with Blockchain?
Updated: Sep 3
What is RegTech?
Regulatory Technology also known as RegTech is the management of regulatory processes within the financial industry through technology. The main functions consist of regulatory monitoring, reporting, and compliance.
In the last 5 years, the RegTech industry has become increasingly more prevalent as seen by the large increase in RegTech Investment deals across the world. According to RegTech Analyst, there were 149 RegTech Investment deals in 2015 which totalled to $1.1 billion and within a span of four years, these numbers had jumped to 317 deals which totalled up to $8.5 billion.
Some would say that this advancement of RegTech was attributed to the Global Financial Crisis in 2008. This is because, post-crisis, thousands of new regulations were introduced around the world as authorities were coming down on financial institutions for their wrongdoings that had led the financial world to the brink of collapse. In the last decade alone, more than US$321 billion was paid by financial institutions for regulatory violations due to regulators stepping up their scrutiny. One such example would be the LIBOR Scandal whereby five major international banks were found to have conspired to manipulate the price of U.S. dollars and Euros exchanged in the foreign currency exchange spot market. The banks ultimately had agreed to pay criminal fines which totalled up to more than US$2.5 billion.
Furthermore, in an industry report by Boston Consulting Group (BCG), it was noted that even a decade after the financial crisis, the banking industry had still not completely recovered and that North American banks had accounted for nearly 63% of the total fines. As such, we see how there is an even greater need for businesses to make the switch to RegTech so as to manage their compliance and monitor regulations better.
Why is RegTech so important with regards to Blockchain?
In order to understand the link between RegTech and Blockchain, we must first understand the Blockchain technology. Blockchain is a data structure that holds transactional records while ensuring security, transparency, and decentralization. Cryptocurrency such as Bitcoin relies on Blockchain technology. In cryptocurrency, there is no central authority such as the government to control it, and instead, transactions made are verified through a network of computers. Completed transactions are then recorded and stored as a block on the Blockchain.
Cryptocurrency exchange businesses such as Binance allow for customers to trade their cryptocurrency. These businesses may face challenges such as security breaches which would mean that personal information is being compromised. Additionally, unregulated cryptocurrency exchanges are highly susceptible to money laundering, further reinforcing the need for compliance.
Compliance is when organisations make use of a set of processes to ensure that employees and the organisation abide by internal and external rules as well as regulations. Traditionally, compliance officers are used to handle these administrative and regulatory work. This method, however, is one that brings about high cost, inefficiency, and inaccuracy. Furthermore, it was estimated that U.S financial institutions spend more than $70 billion annually on compliance.
With RegTech, it helps to automate compliance work which results in increased efficiency, accuracy and lowered cost. These can be attributed to the benefits that RegTech brings. Firstly, RegTech helps to increase efficiency as it makes use of data analytics which enable regulatory information to be analyzed which ensures that businesses are constantly identifying the risks they face and solving them in the most efficient way. It also raises accuracy and reduces cost due to the reduced need for manual labour.
Through the solutions offered by RegTech businesses such as Know Your Customer (KYC) whereby Anti-money Laundering (AML) and Combating the Financing of Terrorism (CFT) screening is conducted, businesses are able to better manage their compliance to the ever-changing regulations. In Singapore, there has been a rise in regulations and crypto businesses are now required to first register then apply for a license in order to operate in the jurisdiction. Hence, there is a need to embrace these changes. RegTech solutions are becoming more important as they help to monitor regulations and manage compliances in the most efficient way possible.
As our world becomes more digitalised, the demand for RegTech follows especially because of the impacts and benefits that RegTech can bring to the cryptocurrency industry and Blockchain Technology. Businesses should make the switch to RegTech where possible so as to not only save costs but raise efficiency and accuracy.