Analysis of Potential Blockchain Use Cases Deloitte Consulting, September 20
A look into KYC in a blockchain world August, 20 Investor KYC Utility Use Case
Investor KYC Utility Introduction Current-state background Know-Your-Customer is the process of every financial institution ensuring the identity of the client as well as his source of wealth is known and monitoring of the business relationship continuously. The compliance with AML and KYC legislation, based on the Third Money Laundering Directive is important and has European reach. The terminology of know your customer can be interchanged with customer due diligence and is founded on a risk based approach. Key Stakeholders Fund Overview In the wake of the global economic recession, KYC requirements have become more comprehensive and encompassing Regulator Transfer Agent Client onboarding alone for a tier - bank can amount to over a million a year on KYC In 20, bank globally have paid over 0 billion in fines for non-compliance with AML and KYC regulations, cumbersome, and costly process The cost of KYC per large banks amounted to over 8. million in 20 and is estimated to reach over.3 million by 209 2 The world s largest banks, from Deutsche Bank to UBS to Barclays have revealed they are testing the increasingly popular distributed ledger technology to solve regular pain points facing the banking industry 3 Investors. KPMG Issues and Insights, Transforming Client Onboarding, 20 3. KYC exchange Net, Deloitte Analysis 3. TechWorld, Why banks are betting on the blockchain not bitcoin to transform the financial sector, 20 3
Investor KYC Utility Key Market Participants Market participant Role Description Fund Regulator Transfer Agent (TA) Investors Core Core Core Supporting Obliged to respect KYC requirements and ensure fund administrator is executing and reporting on KYC Overall authority & control on regulatory reporting compliance procedures Ensure validation of documentation of investors and confirms identity and source of wealth Individuals/corporate whom participate in KYC via financial institutions
Investor KYC Utility Current-state process depiction Fund Compliance 2 3 * TA Regulator Investor 7 8 Fund 0 Compliance 9 9* TA Current-state process description Share application form & documentation requirements * Ongoing Reviews - if update needed, Step 2 & 3 repeated Share application form & documentation requirements 9* Ongoing Reviews - if update needed, Step 2 & 3 repeated 2 Send documentation to the Transfer Agent Report to all relevant parties 7 Send documentation to the Transfer Agent 0 Report to all relevant parties 3 Upload, verify, and approve documentation. KYC checks & identify additional documentation 8 Upload, verify, and approve documentation. KYC checks & identify additional documentation If additional documentation - Step 2 & 3 repeated 9 If additional documentation - Step 2 & 3 repeated
Investor KYC Utility Current-state pain points Fund 8 Compliance 2 TA 3 Regulator Fund Compliance Investor 7 TA Current-state pain points Multiple transfers of the same documentation to TAs 3 Limited responsibility and control of own/investor data Same KYC checks executed by all Tas 7 Difficult and time 8 Limited Transparency - consuming ongoing Reporting monitoring 2 Paper/email communication with TA Highly manual KYC checks/validation & Highly manual reporting process for TA No control over documentation accuracy (falsification)
Investor KYC Utility Future-state process depiction 3 Bank 2 7 8 Future-state process description Investor creates digital identity record 2 Trusted third parties verifies and approves 3 Investor shares identity information Due diligence checks, screenings and Investor record updated 7 and seeds with initial data (agreeing to be part of utility) key attributes. required for KYC with financial institution investigations are undertaken with new credentials (compliant status) Second financial institution requires and receives access to investor details, including the compliant status and can request copies 8 Ongoing data quality and KYC status monitoring via blockchain Changes to investor documentation / information can be monitored and reacted upon in real time 7
Investor Know-Your-Customer Utility (KYC) Future-state benefits Bank 3 7 2 8 Future-state process description Increased investor responsibility/control 3 Focus on data analytics and mitigation actions Allowing for a Single Source of Truth of latest up-to-date information 7 Guarantee transparency 8 with all parties involved in KYC process Ability to React Real Time to Market/ Customer Changes 2 Eliminating redundant upload of data Reduced AML risk Increase efficiency & reduce costs 8
Stakeholder alignment Critical condition categories Technology Regulatory Governance Investor KYC Utility Critical conditions Build requirements need to be scrutinized & agreed on Trusted 3 rd Party need to agree to involvement to make system work Adopting standards and ensuring consistency for all parties Due to the complexity of the build, the design specifications will need to be scrutinized and agreed on and will need to be future proof An authorized third party will need to be heavily involved in setting up the system Consensus amongst all the main players such as fund administrators, fund managers to adopt the same standards for onboarding and data protection access Why? Why? Why? Due to the potential scale and the sheer amount of end users involved in this build, the design of the build requirements need to be scrutinized greatly For a system of KYC utility including identity documentation to be established it is crucial that trusted third parties are involved to validate the documents and due diligence. Due to differing risk profiles, fund administrators request different standards of documents and criteria. The level of access and storage of this data on a blockchain database is to be agreed upon as well. Challenge Challenge Challenge To create a build design which will be future proof and work well at scale Similar projects in the world currently (e.g. Aadhaar in India) have governments involved, trusted 3 rd parties involvement will be a critical condition Ensuring from the outset that standards are agreed and consistently followed through the design and build process of the blockchain 9
Investor KYC Utility Additional considerations Scalability Disintermediating the TA Overview What is the most effective way to scale out the solution is a consideration which need specific attention Overview The TA is now the main intermediary between an investor and investing directly in a fund, could this change? Impact A blockchain solution could initially be applied to a number of fund administrators, which would then link into the regulator. The blockchain solution could be scaled to incorporate retail banking or insurance, given the same KYC Utility could be utilised across a number of financial products. Further scale can be achieve by broadening the blockchain solution to an EMEA level, which would mean other countries would also need to have a smart identity to be involved in the process. Impact KYC checks are linked to documentation on the KYC utility and can be done automatically and a compliance status allocated by a central authority is part of the smart identity Subscription / Redemptions are only executed when status is compliant and automatically stops redemption if the status changes to noncompliant With digitalization of all documents, full transparency is guaranteed an no reporting required anymore Overall, the role of reporting, redemptions and uploading documents will become obsolete, therefore meaning there is no need for a TA 0
A look into regulatory reporting in a blockchain world August, 20 Regulatory Reporting LCR - Use Case
Regulatory Reporting LCR Introduction Current-state background Regulatory reporting involves submitting summary data to a regulated body that will determine whether a bank is compliant with applicable regulatory provision. The reports gathered assist the regulator in evaluating the financial security of financial institutions. Central bank Key Stakeholders Financial Institutions European Central Bank Overview The financial crisis has led to the establishment of the Financial Stability Board (FSB) who coordinates the work of national financial authorities and standard setting bodies at an international level to ensure a resilient banking sector. Key reforms which have been introduced under FSB are: Basel III capital requirements Liquidity Coverage Ratio (LCR) The Liquidity Coverage Ratio (LCR) has been created ensuring that banks have an adequate level of high-quality liquid assets in order to absorb financial and economic stress that can arise at any moment on the market. The FRB in particular is requesting specific details on the data quality controls and reconciliation processes that firms are using to determine the accuracy of their regulatory reports and capital plan submissions 2. Customers The Regulatory Responses to the Global Financial Crisis: Some Uncomfortable Questions, IMF, 20 2 Forward look Top regulatory trends for 20 in banking, Deloitte, 20 2
Regulatory Reporting LCR Key Market Participants Market participant Role Description Financial Institutions Core Complete the regulatory reports, sending them to the central bank and take action to ensure compliance Central Bank Core Review & analyse the reports, taking action where applicable European Central Bank Customers Core Supporting Overall authority & control on regulatory reporting compliance procedures Individuals/corporate whom participate in financial activity with financial institutions 3
Regulatory Reporting LCR Current-state process depiction Stored Data Formatted Reconciled Report completed Approved Report retrieved A D 2 3 D B Current-state process description Data from various databases are pulled into an Excel 2 Data is formatted and calculated in Excel under the ratio components: 3 Figures are reconciled manually Figures entered into European Banking Authority (EBA) CEO and / or Treasurer will verify & approve spreadsheet High Quality Liquid template report final report Assets (HQLA) with appropriate haircuts Outflows Inflows CEO and / or Treasurer submits report to Regulator via web portal *All over a projected 30 day period
Regulatory Reporting LCR Current-state pain points Stored Data Formatted Reconciled Report completed Approved Report retrieved A D 2 3 D B Current-state pain points Inconsistent Data Quality: The quality of the data varies in consistency as it is stored and gathered from various different databases. 2 Manually Processed: The gathering, analysis and reporting of data from various different databases is time consuming and requires a substantial amount of resources. Data Manipulation: There is a risk that the regulator will receive error ridding or manipulated data from reports
Blockchain Regulatory Reporting LCR Future-state process depiction Banking Layer Blockchain Layer BI & Connectivity Regulatory & Banks Bank applications Local databases Regulator 2 3 BI Application Bank Future-state process description Raw data from different applications is sent via bank applications and stored on the blockchain as well as the current databases 2 Liquidity Coverage Ratio (LCR) is calculated on the blockchain and a report generated 3 The regulator can access their business application A regulator application can allow reports to be pulled from the blockchain database
Blockchain Regulatory Reporting LCR Future-state benefits Banking Layer Blockchain Layer BI & Connectivity Regulatory & Banks Bank applications Local databases Regulator 2 3 BI Application Bank Future-state benefits Automated process: The data uploaded to the blockchain is in real-time and not outdated 3 Cost Savings: With fewer participants, the improved cost structure can generate value Request access: A easily navigable user interface for regulator 2 Eliminated data manipulation: Liquidity Coverage Ration can be completed and a report generated in real-time Single Source of Truth: One single database which stores all data in one single accessible point Automated compliance: the regulator will have on-demand access to all reports generated on the ledger 7
Blockchain Regulatory Reporting LCR Future-state benefits Banking Layer Blockchain Layer BI & Connectivity Regulatory & Banks Bank applications Local databases Regulator 2 3 BI Application Bank Future-state benefits Automated process: The data uploaded to the blockchain is in real-time and not outdated 3 Cost Savings: With fewer participants, the improved cost structure can generate value Request access: A easily navigable user interface for regulator 2 Eliminated data manipulation: Liquidity Coverage Ration can be completed and a report generated in real-time Single Source of Truth: One single database which stores all data in one single accessible point Automated compliance: the regulator will have on-demand access to all reports generated on the ledger 8
Regulatory Reporting LCR Critical conditions Ensuring compliance via standard LCR reporting processes Adopting standards and ensuring interoperability Members of the ledger need to converge on common LCR reporting processes to effectively identify stakeholders involved in the transaction and ensure a template set is available on DLT Why? Real-time and accurate LCR reporting for banks is enabled when a trusted and standard dataset are provided on DLT Challenge Creating a standard LCR reporting template will be difficult to implement across various regions globally. Consensus on the choice of DLT platform across a significant number of FIs will allow economies of scale and higher return on investment Why? Different ledgers and/or adoption cycles from key stakeholders would compromise benefits and lead to interoperability issues Challenge The differing priorities, levels of urgency and budgets of players will created obstacles to forming international agreements among participants. Critical condition categories Stakeholder alignment Technology Regulatory Governance 9
Regulatory Reporting LCR Additional considerations Scalability Overview What is the most effective way to scale out the solution is a consideration which need specific attention Impact A blockchain solution could initially be applied to LCR Regulation between the Central Bank of Ireland and Irish banks The blockchain solution could be scaled to incorporate multiple regulations reported by Irish banks to the CBI. E.G. Leverage Ratio, Net Stable Funding Ratio Further scale can be achieve by broadening the blockchain solution to incorporate multiple regulations, across multiple European Central Banks reporting to the European Banking Authority 20
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