With every new innovation comes a new business model, technologies, processes, and players intent on reinventing the marketplace.
Take, for example, the introduction of a new payment solution on a peer-2-peer payment application. The application looks to bring speed, efficiency and integration for a given transaction. In turn, this provides simplicity and ease of use for the consumer. However, with these new technologies, there are also built-in complexities requiring greater security and protection of the consumer. Service providers need to ensure that there is proper governance model to adhere to the standard in regards to entitlements and security of the data in an underlying transaction.
There is always a risk associated with the innovation, the general consensus seems to be that there is a need for a regulatory body to mitigate the potential, unpredictable fallout from a new business model, and new products. The inherent force of blockchain along with other FinTech innovations has raised questions for regulators around control and administration of the marketplace. However, the level of risk presented is not new. There are multiple reasons asking for a need for regulations, the key reasons being:
- Enabling consistency in operations
- Preventing sudden market collapse
- Protecting consumers
Financial systems with the blockchain framework will function very differently than in its current state. New processes/rules need to evolve to safeguard and prevent sudden market collapse. It's also very important to protect the consumer in a market driven system.
Again, expanding on the earlier example of a peer-2-peer payment system. There is a need to have a safeguard in place to ensure that the payment was delivered and received by the designated payee and also to ensure that the account using which transaction is made is not compromised. Furthermore, for international money movement, the system needs to ensure that it complies with the local jurisdictions. There also needs to be checks and balances in place to ensure it is not used in money laundering to finance criminal/illegal activities.
With the hyper ledger blockchain based solution, it has the potential to eliminate some of the challenges with transparent transactions.
Blockchain offers all the parties involved in the business a secure and synchronized record of transaction. The blockchain ledger records every sequence of transaction from beginning to end, whether it is 100 of steps in a supply chain or single online payment. As each transaction occurs, it is put into a block, each block connected to one before and after it. Groups of transactions are blocked together and a fingerprint of a block is added to the next facilitating creation of an immutable chain. It can trace the movement of money through all the hops and clearly help identify its sources and destination.
There are key features of blockchain that may further help payment provider meet the regulatory requirement: It is distributed; It is secure; It is Permissible.
As the ledger is distributed it helps to maintain a shared form of record keeping, meaning no one person or organization owns the record.
As money moves across the various jurisdictions/entities, everyone involved in the process is permissioned to have a copy of every piece of data. On these transactions, it prevents further amendment/addition of any data to the chain without the consensus of the participants. It further ensures that no one person or entity can add to or alter the transaction without it being permanently recorded. It in-turn makes it secure and provides an auditable record of information.
From a regulatory perspective, it can also be further customized to offer a different view, a transacting firm can have a node created for the transaction with a regulatory impact. There can be application software built integrating transactions on these nodes with the underlying references and processes providing almost real time view on various regulatory areas related catering to different regulatory bodies.
Think of blockchain technology as enabling the 'Internet of Finance'. We already have a global financial system, but it is inefficient with unnecessary built-in costs for its users. Blockchain technology can not only be used to keep track of credit and debits (in terms of payment provider solution that we reviewed). It can also be used to keep track of any data that involve a transaction or record of ownership in some way. Blockchain technologies further help streamline these transactions gives us an ability provide efficiency, ease of use, and cost benefits to the consumer at one end of the spectrum and also helps facilitate transparency and security, enabling a clear transparent view of the movement of the goods and services.