Regulatory technology, also known by the shorthand “RegTech,” has only maintained a presence in the mainstream for the past few years. With that said, this growing field is transforming how regulated industries report their activities, manage their risk, control for privacy, ensure compliance, and monitor regulated transactions. Established RegTech solutions offer quantifiable savings in the time, workload, and costs associated with compliance. However, RegTech is not only transforming private sector compliance, it is also shifting the way that laws are made.
Modern regulated industries have no choice but to embrace digital transformation. Tracking and reporting digital information from various sources and of various types must be captured and reported. Thankfully, emerging decentralized technologies – particularly the blockchain and smart contract applications – are supporting the evolution of regulatory technology. This is functioning to expand private compliance capability well beyond growing demands from regulating agencies. At the same time, however, it is opening up new avenues of possibility for regulated activities.
Regulatory Technology Becomes Non-Optional
Regulated industries have long been accustomed to collecting data and monitoring privacy. However, the growing privacy requirements imposed by local and international laws are increasing and expanding every year. As a result, many organizations are finding a complete overhaul of their compliance and communication tracking technologies a painful necessity. Consider an example: the GDPR.
In 2018, the General Data Protection Regulation (GDPR) responsible for tracking changes in the law, electronic privacy regulations, and reporting for compliance. For example, financial firms and other regulated entities active on the European continent are slowly growing accustomed to the requirements imposed by the General Data Protection Regulation. For some of these regulated industries, compliance has been a long, slow road. For others – particularly those already familiar with the benefits of decentralized technologies like IoT devices, edge computing, blockchain ledgers, and smart contracts – are staying ahead of regulators and competitors alike.
How RegTech is Transforming Business and Policy
The financial crisis of 2008 triggered several globally-relevant financial regulations. This includes Dodd-Frank in the U.S., as well as the GDPR, MAR and MiFID II in the EU. As a result, the financial services sector is facing growing obligations with respect to both the collection and protection of private customer and employee data. These reforms have thrown several unsuspecting industries for a loop, and are still struggling to comply. This is particularly true with respect to companies that have struggled to upgrade or replace legacy compliance software systems with technologies capable of achieving proper compliance. This task has proven overwhelming to some companies that refuse to embrace decentralized technologies. For an unfortunate few among them, achieving regulatory compliance is going to get much harder before it gets easier.
Regulatory Technology Forces Improvements
Instead of avoiding the burdens of regulations, well-informed regulated organizations that move quickly to adopt new policies, procedures, and technologies to improve the efficiency of compliance while also improving operational efficiency and building consumer trust.
Market regulations and personal privacy laws improve customer trust. Consider the case of Nordea Bank, which saw a meaningful slump in its stock price after the financial institution was implicated in a money laundering investigation. The company chose to embrace change and the regulatory technology that can facilitate easier compliance. By improving the quality of fraud and market abuse detection rules, Nordea Bank has both improved compliance and built greater consumer trust.[1] But what exactly does RegTech look like, and how does it work?
RegTech and Decentralized Technology
Decentralized technologies are a fascinating product of the digital era. They allow for advanced computing to occur in a superior fashion in more places around the world than ever before believed possible. This opens up new opportunities within regulated industries, which are often suffer the impacts of monopolistic power consolidated within a few large market players.
The decentralized technologies that power modern RegTech primarily include Internet of Things (IoT) devices connected by edge computing technologies, as well as blockchain ledgers and smart contracts. The essential framework of decentralized technology, blockchain in particular, functions to serve he requirements of many financial institutions regulated by multiple jurisdictions. Blockchain ledgers and smart contracts provide a framework suited to support both operational efforts and privacy protection.
Blockchain was originally created as a fully digitized and centralized chronological record. Up until the past few years, this record was limited to cryptocurrency transactions. But today, this technology infrastructure provides a collection, storage, and transactional basis for the various data streams that regulated industries must track and disclose. This is why major players in technology, such as IBM, as well as scrutinous Lee regulated industries, including MasterCard and NASDAQ. Are already leveraging the use of blockchain in regulated operational activities.[2]
Blockchain, Smart Contracts Power the Future of RegTech
Today, decentralized technologies like blockchain ledgers and smart contracts are carving a new competitive edge in the growing marketplace of RegTech providers. Indagia’s expense auditor, for example, is a machine learning software that leverages blockchain technology and smart contracts to improve the efficiency of financial auditing. Another solution provider, in DoWTechnology Company, has developed what it calls The Company Licensing Tool, which reduces the time required for managing and reporting necessary information to manage insurance company licensing and line-of-business information. Qomply has developed an entire suite of diagnotics tools that allow organizations to automate transaction processing and reporting control processes that supports cross-jurisdictional compliance.[3]
Leveraging the power of decentralized technology, each of these right text solution providers has developed a way to improve the timeliness, efficiency, and completeness, regulated data and operations. In this way, decentralized technology is shaping the future of RegTech, and RegTech is carving out new opportunities for the development and monetization of decentralized technologies.
[1]https://www.bloomberg.com/news/articles/2019-03-04/nordea-drops-finnish-yle-to-send-money-laundering-program
[2]https://independentbanker.org/2018/10/how-blockchain-could-help-keep-you-compliant/
[3]https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/technology/lu-regtech-business-cases-compilation-2021.pdf