How blockchain can improve banks' AML operations & stop human trafficking & other crimes

How’s this for irony? Blockchain and cryptocurrencies - once seen as the financial tools of choice by criminals - can be put to use to stop and prevent financial crimes by helping banks enhance their anti-money laundering (AML) operations. But despite the promise blockchain offers, many FIs are still cautious about applying it. Let’s break down the three most common fears FIs have about blockchain - and address how to think about them.

Fear: You’ll be dependent on 3rd parties

One of the most common barriers to blockchain adoption among banks is how much they will have to depend on outside parties for access to data. Many banks are hesitant to trust newer FinTech players or younger startups for blockchain-related information because both the technology and the companies that operate in the space are such new entities.

Tip: Build your own blockchain links

Blockchain aggregator relationships are similar to the arrangements most FIs have with credit bureaus to verify customers’ historical information. When these institutions first debuted, many banks weren’t sure how to work with them or if they could be trusted. Now, banks face a similar dilemma with blockchain and the FinTechs who operate in the space.

Blockchain technology has been around long enough for some players to emerge as more trustworthy than others. FIs and banks that are considering taking their first steps into blockchain should connect with FinTechs that work regularly with established blockchain players – such as Chainalysis or CipherTrace – to see how they have innovated over the years. Developing this rapport will help FIs understand how the space is shifting and how to implement blockchain into their risk management strategy. 

Fear: The blockchain ownership is unclear

Accessing blockchain technology is just one step. Understanding the information encrypted in the technology is another challenge altogether. FIs will need to understand who owns the blockchain and their respective relationships to all blockchains. If the information isn’t clear, FIs will struggle to untangle dirty money schemes connected to criminal activities like money laundering and have more data to sift through. 

Tip: Use blockchain to gain clarity

AML typologies are highly complicated and criminals constantly find new ways to disguise their illicit activities in legitimate financial systems. Implementing blockchain solutions enhances banks’ network analytics capabilities and AML operations making it much clearer for banks to connect the dots of ownership and related parties in their systems. This clarity reveals who the real owners of blockchain are and who they are conducting business with to report suspicious activity.

Fear: Blockchain’s future is unknown 

Banks aren’t the only ones debating how to implement blockchain technology. Government agencies and policymakers are also debating that question and considering their own business cases. Amid this debate, there is no clear consensus to date. In the regulatory landscape, views on blockchain’s potential can vary from region to region and agency to agency. Some think it has long-term promise. Others don’t think it will last. Still, others think it needs more regulation. This lack of clarity from regulators, particularly across different regions, can make it harder for FIs to understand the technology’s long-term implications.

Tip: Blockchain isn’t going anywhere

Regulators and governments might be debating how to use blockchain, but that doesn’t mean the technology is going anywhere. Expect more businesses to adopt blockchain and cryptocurrency solutions in the future. This will increase pressure on governments to accept blockchain’s usage in AML operations. Bottom line: blockchain is not going to be a flash in the pan.

Criminals and scofflaws may have been among blockchain’s earliest adopters. But the technology has shifted considerably in the years since it first debuted. Today, it holds considerable potential to help FIs stop financial crimes. Banks have to be willing to understand and trust blockchain technology to bring their AML compliance and financial crime prevention strategies into the modern age.

Financial institutions can’t afford to give fraudsters or money launderers a safe haven. Download our eBook How to Choose a Machine Learning Platform to Detect and Prevent Financial Crime to get the ultimate guide to selecting a machine learning vendor.