Underbanked households would benefit from a regulated blockchain
After years on the fringe, blockchain technology is catching the eye of regulators as a way to bring some of the most profound innovative technologies into the financial mainstream.
But as these technologies step further into regulatory purview, it is imperative that regulators and users fully understand the capacity of blockchain technology to improve financial access and engagement for underserved communities as well as strengthen financial system integrity, especially during the current economic and public health crises.
The Office of the Comptroller of the Currency recently made an important and welcome step by requesting comments on potential applications and regulation of blockchain-based tools. The move acknowledges advances that fintech and regtech are making to modernize the architecture and functionality of the financial system.
Already there are targeted and tested applications of blockchain that can help small businesses, underserved individuals and local communities weather the coronavirus pandemic. Relief efforts like the Paycheck Protection Program could be further improved with enhanced due diligence and transaction auditing that would streamline and modernize required anti-money-laundering compliance and financial crimes compliance.
Digital and crypto-related financial products could also help people who lack sustainable formal banking relationships to receive federal and state funds, including stimulus checks issued securely and expediently. And while cross-border remittances have slowed as a result of layoffs, digital tools could allow foreign workers in the U.S. the flexibility to receive needed funds in the opposite direction, from their home countries. This is especially critical sincea reversal of remittance flows has been tied directly to the economic consequences of the pandemic.
To be clear, distributed ledger technology is not a panacea, but its core attributes reinforce and strengthen essential controls required by regulators.
First, the immutability of the ledger prevents participants within a network from changing or tampering with transactions once it has been recorded. Second, since the technology is decentralized, it provides greater transparency and decreases risk of important information being concentrated within one group or organization. Third, the encrypted nature of blockchain strengthens data privacy and security while enabling secure data-sharing between counterparties, including with regulators and law enforcement when necessary.
Many financial institutions remain reluctant to incorporate blockchain tools into their payments or compliance operations. Skepticism from industry, regulators and policymakers has further dampened interest.
Yet, essential financial products and services are increasingly being facilitated outside of the traditional banking system, often at a faster pace. Many of these new tools are accessible across borders, beyond a particular regulatory jurisdiction.
In order for the financial system to continue serving existing customers while reaching new consumers, businesses and communities, regulators should issue guidance based on the activities and practices of a particular entity to reinforce security and transparency as financial innovation continues to accelerate.
Even before the pandemic, nearly 1.7 billion people worldwide and 55 million adults in the U.S. were unbanked, limiting their ability to invest in their family, education, health or owning a small business. The coronavirus crisis has only worsened pre-existing inequalities for those left out of the traditional financial system.
The OCC's efforts are welcome and needed. The public comment solicitation recognizes that blockchain tech is a necessary part of the modern economy that needs oversight in order to be safely adopted and deployed as an innovative payments mechanism with important embedded compliance controls.
Bringing these rules up to date does not mean allowing bad actors or illicit activities. The sector has long endeavored to build and modernize a common set of compliance protocols while enhancing operational efficiencies and security.
Modernizing regulatory guidance to include the fintech and crypto ecosystems is a promising development. These new ecosystems are the bridge between traditional finance and non-traditional fintech (and regtech) entities.
Innovations are making it easier for financially underserved people and businesses to access financial services in the U.S. and around the world. It’s time for regulation to be equally innovative in an increasingly financially borderless world.