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Blockchain pitched as derisking tool for banking, cross-border trade

Published:Wednesday | October 11, 2017 | 12:00 AMAvia Collinder

Digital ledger, or blockchain technology, is set to change the way both private companies and governments do business, says Mat McGuire, a financial crime risk management expert from Canada.

The technology has substantial utility as a solution to money laundering and tax evasion, notwithstanding growing concerns about its use in the development of cryptocurrencies that finance illicit activity on the dark side of the internet, the dark web, McGuire told a conference in Kingston.

In his scripted presentation, he cited the example of the Republic of the Marshall Islands, which in 2011 was found to have deficiencies in its programmes that "were symptomatic" of violations of treaties and conventions, stemming from its association with anonymous corporations.

"A study of international queries related to money laundering found that all were enquiries related to anonymous corporations, and that most enquiries were seeking information about corporation formation and beneficial ownerships," he said.

Since then, the Marshall Islands has publicly committed to remedy the situation by establishing a new database with enriched information that would allow it to meet its domestic needs and international obligations related to crime management, sanctions, as well as tax administration and enforcement.

The blockchain solution, as outlined by McGuire, promises to "collect and validate sufficient information about the owners, directors, controllers and affiliates of the entities registered in the region, showing lineage of that information; facilitate the sharing of information among agencies and international partners; facilitate revenue development; and limit administrative burden".

The technology replaces the traditional ledger form used to keep a history of transactions, provides ease in transfer of value, reduces the usual friction experienced in cross-border transactions, cutting out the middleman and thereby cutting cost, he said.

"It will change how global trade is conducted," said the risk management expert at the annual Anti-Money Laundering/Counter-Financing of Terrorism conference. "Every major bank and stock market operator is currently looking to employ and/or are currently developing technologies centred around blockchain technology," McGuire added.

He describes blockchain as a "distributed database that maintains a continuously growing list of ordered records, called blocks. Each block contains a time stamp and a link to a previous block. Once recorded, the data in a block cannot be altered-retroactively."

Crytopgraphic signatures, or taches, help to keep the historical record of all data inserted accurate.

The technology's utility includes its transactional value, he said, noting it eliminates cross-border restrictions, eliminates the need for correspondent banking, offers instant settlement and traceable transactions, is low cost, and the history of transactions is publicly available.

A PwC-authored article titled "Blockchain accelerates insurance transformation", points out that financial-services organisations have been the most active innovators in blockchain.

"Since early 2014, more than 40 financial-services firms or their strategic investment arms have invested in a blockchain or related start-up. And this is spreading to other areas of finance, like insurance," PwC noted.

"The real economy is getting in on the act, too, with significant activity in the government, health care, supply chain and real estate sectors," the auditing firm said, adding that since the system relies on references to other blocks that are cryptographically secure within the digital ledger, it is almost impossible to falsify.

McGuire similarly notes that "blockchains are secure by design" making the technology suitable for the recording of events, titles, medical and financial records, among other uses.

For the Marshall Islands, the proposed solution was an interoperable, blockchain-based company registry to record and track ownership information in real time.

The capabilities of that system include the ability to "register and provide information at various levels of transparency, which will at a minimum provide the basics for international compliance and facilitate business relationships and create 'smart contracts'," McGuire said.

It features unique tokenisation - that is, keys or codes used for database access - for every transaction, to validate the entry and the parties viewing the ledger or database.

"All entries are historic and recorded in the ledger. Tokens in each country could eventually be sent to another country for specific validations of entities registered," McGuire said.

Such a system could also feature binding contracts - smart contracts - for the release of data, tax reviews and payments, and to manage business licence registration and distribution.