Does Blockchain mean an end to regulatory reporting as we know it?

The world of regulatory reporting isn’t perhaps the most obvious candidate for disruption by new technology: being governed by well-established rules, systems and processes which have built up over decades designed to underpin trust and determine what counts as credible information, this is an arena where the cost of mistakes or inaccuracies is high.

Yet Blockchain has the potential to transform the backward-looking way regulatory reporting currently operates, where firms and regulators alike apply rules retrospectively. This isn’t surprising.

Uniquely, Blockchain has the potential to underpin compliance, oversight and analysis in real-time, with a single source of credibility in a distributed ledger across multiple parties, viewable on a need-to-know basis, automating a wide range of activities from data validation to analysis and insights.

The benefits are potentially very significant: introducing cost savings, improving governance, reducing lead times, ensuring business continuity, boosting investor confidence and creating channels for direct and autonomous communication between regulators and those they regulate. In a post-GDPR world there is also the potential to build privacy and controls into reporting models by design.

Regulation and compliance is a good starting point as a use case for Blockchain technology, and where it can be applied to solve a common challenge which isn’t a differentiating factor competitively. This can act as a low risk introduction for the technology within an organisation or a firm: building a network which can be used for other purposes in future.

So where are we seeing the first breakthroughs?

Blockchain technology is proving particularly relevant to transactions which involve multiple parties such as reinsurance - where reporting covers the insurer, the insured, the reinsurer, the regulator and the broker - or syndicated loans, involving a syndicator, lead arranger and requesting entities.

Complex transactions of this nature come with additional risk factors which Blockchain can mitigate by providing a single immutable ledger viewable by all parties, reducing complexity and allowing participants to meet their reporting obligations more quickly. Blockchain solutions tend to replace the costly and time-consuming process of sharing electronic – or even paper – documents between participants.

For example, Deloitte developed the RegChain proposition, using Blockchain technology to replace processes for compliance of Money Markets Investor Funds Returns. This project, in collaboration with Irish Funds and four global asset servicers, leveraged Blockchain as an immutable data source and ran smart contracts that could be deployed to generate the quarterly reports currently reliant on Microsoft Excel and macro’s for running the compliance checks. Our findings showed significant benefits on data immutability, use of smart contracts for running rules on the data and cost savings overall.

Issues which affect one industry vertical can be applied to other regulatory challenges and value chains. In Ireland, a Blockchain based solution has been developed to improve transparency and reduce fraud in educational certificates.

Replacing a paper-based system, EduScrypt (Deloitte’s certification and qualifications management proposition) was designed for services-related minimum competency code, producing a single immutable ledger viewable by administrators, the employee, regulators, those making hiring decisions and professional bodies. This has reduced costs and helped prevent the fraudulent use of qualifications, where previously there had been cases of expiry dates on paper qualifications being changed by hand.

This concept is applicable anywhere where validation of credentials or qualifications is required, and it isn’t surprising that we’ve seen serious interest in manufacturing, consumer goods and other industries.

Similarly, the pharmaceutical industry is exploring use cases for Blockchain. This has been through sharing licencing information and the results of clinical trials, storing data safely across multiple parties and potentially reducing the cost of developing new medicines.

Regulators are an essential piece of the jigsaw and have an important role to play by permitting and engaging with the digital transformation of industry processes where Blockchain can be the best tool to deliver the required outcome. In the UK, the Financial Reporting Council has placed Blockchain technology, front and centre, in its future vision of its ecosystem and is leading efforts to achieve greater interoperability and common standards.

At a European level, the EU Financial Transparency Gateway (EFTG) is a pilot project, based on a Blockchain technology (or mechanism), to bring together the information listed-companies are required to report to domestic regulators, transcending different file formats and languages.

This addresses the issue of cross-jurisdiction common reporting, including among subsidiaries, across EU member states. The adoption of international and pan-EU standards for financial reporting in formats like IFRS and XBRL enables greater alignment of regulatory, economic and commercial frameworks, with involvement from the EU Directorate-General for Financial Stability, Financial Services and Capital Markets Union (FISMA) and the European Securities and Markets Authority (ESMA).

We are also seeing the continued development of open source distributed ledger platforms such as Corda, Ethereum and HyperLedger Fabric, which seek to create an underlying infrastructure compatible across firms and institutions. Cloud vendor software firms have also seen growth prospects across these ecosystems by moving from private data centres to cloud infrastructure - and are growing their technology infrastructure capabilities in order for multiple clients to meet their ongoing reporting requirements. Each vendor has a different perspective on Blockchain platform variants and in applying governance around data in meeting reporting obligations.

We are currently still at the early adopter stage. To encourage participation and adoption, ecosystem by ecosystem, greater progress is required on agreeing common standards and consensus mechanisms. The global standard governing the exchange of financial data, ISO20022, provides a solid foundation for this.

These foundations – through the adoption of governing standards like ISO, IEEE and ITU – have the potential to reconfigure digital finance activity across the globe. They can achieve this by creating new ways to reinvent activities such as risk management, account and cash management, credit financing, shared value financing, securities trading and settlement, cross border payment processing, equities post settlement, trade finance including greater management of trade services across value chains.

Equally, we are likely to see innovation in the private Blockchain space within closed rather open loop networks. More controlled networks among a closed list of participants can get off the ground more rapidly.

The greatest strides forward will be where regulators and firms across an ecosystem work together, and where the time and cost of meeting reporting requirements can be transformed by Blockchain solutions with buy-in from multiple parties. Here, the key drivers are on identifying a business case and making this a multi-disciplinary journey, involving experts across tax, legal, technology, risk advisory, financial and cyber security.

On tech side, the application of disruptive technology (Blockchain and other technology capabilities like IoT and sensors, cognitive analytics, natural language processing, machine learning and artificial intelligence), will provide new avenues for management information and intelligence with engagement and collaboration of multiple parties between both the public and private sector.

In applying emerging technologies to regulatory reporting, the potential changes to the established ways of doing things are revolutionary and at a system-wide scale. But so are the benefits – including benefits we don’t yet recognise. That’s why the journey of adoption and experimentation is so vital.

The blog is authored by Jamie Counihan, Deloitte EMEA Blockchain Lab, Dublin.

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