The Basel Committee on Banking Supervision (BCBS) released a consultation paper on the implications of fintech for the financial sector last Thursday on August 31st named, Sound Practices: Implications of fintech developments for banks and bank supervisors. The paper observed various scenarios such as distributed ledger technology and innovative payment services.
BCBS is of the view that:
Banking standards and supervisory expectations should be adaptive to new innovations, while maintaining appropriate prudential standards.
Below is the extract of a section, titled: Risk and opportunities for anti-money laundering and countering the financing of terrorism (AML/CFT)
Increased risk: Digital finance raises news risks and challenges with regard to AML/CFT. New areas of vulnerability might develop because of new financial products (virtual cryptocurrencies) and new technologies (eg a permissionless distributed ledger based on anonymous users and on decentralised governance without accountability). Digital finance gives rise to an increasing number of financial players and eases cross-border transactions, which makes the monitoring of transactions more complex for financial institutions and public authorities. Finally, while new financial players are reshaping the financial sector, they may be outside the scope of banking sector regulation and subject to less stringent AML/CFT rules than are banks. If not proportionate to the AML/CFT risks, these regulatory gaps or loopholes may lead to some distortion of competition, which may violate the level playing field principle and lead to increased potential for financial crime.
Innovative solutions: New technologies may support greater efficiency for AML/CFT policy. Regtech companies are especially keen to enter this field, which could attract significant investment by banks. Analytics of non-structured data (big data) associated with machine learning and AI can support banks’ financial crime divisions in the monitoring and reporting of suspicious transactions. While non-face-to-face relationships are usually considered as a “high risk” for AML/CFT, requiring enhanced due diligence (see Financial Action Task Force’s 2012 report on money laundering), technologies such as biometry (eg fingerprints, iris or vocal recognition, touch ID etc), and scanning technologies may also help identify fraud in a digital environment and promote remote but secure customer identification and authentication processes. E-identification and e-signatures may provide new secure opportunities to facilitate the digital on-boarding of customers and non-face-to-face business relationships.
Initiatives in a number of countries involving the use of innovative technologies for identification services are in different stages of development. For example, the UK government is promoting e-identification through its Verify programme, to which banks such as Barclays contribute by certifying the identity of their customers. In Canada, SecureKey, a private sector company that includes a number of banks as investors, proposes to use a third-party blockchain as an identity and authentication provider to simplify consumer access to online services and applications.
Similarly in the Netherlands, a service called IDIN, supported by seven Dutch banks, was launched in 2016 to enable customers to identify themselves to other organisations online using bank authentication credentials.
Both the UK and Canadian initiatives are supported, to some degree, by governments. In these identity “ecosystems”, banks may provide identity information, subject to customer consent, as well as receive it.
Some regtech providers and countries would like to set up shared Know-Your-Customer utilities for due diligence using cloud and online platforms. The BCBS acknowledges such utilities for conducting customer due diligence in its revised guidelines on the sound management of risks related to money laundering and financing of terrorism. However, jurisdictions may follow different approaches in promoting innovative business models and emerging technologies, while mitigating and addressing associated money laundering and terrorist financing risks.
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