Will blockchain hype be tempered by compliance requirements?
28 Jun 2017

Izabella Kaminska recently published an article in the Financial Times tempering the excitement that blockchain proponents possess. She asks, in part:

Has blockchain hype stood the test of time? Or does the next phase in the Gartner hype cycle — ‘the trough of disillusionment’ — beckon? We are either there already or about to arrive.

Her perspective touches on the wider use of and skepticism about blockchain as a multi-industry technology. Here, I will narrow the focus to compliance-specific aspects of blockchain’s use in the financial industry.

Some of blockchain’s touted benefits include:

  • Reduced third-party oversight for transactions, thus lowered costs
  • Complete, consistent, timely and accurate data
  • Decentralized networks, which are less susceptible to cyber attacks
  • Transactional transparency and immutability

Let’s break down each benefit’s potential effect on regulatory compliance within financial institutions (“FIs”).

Reduced third-party oversight for transactions, thus lowered costs

Financial institutions are unlikely to perceive this as a benefit since they act as third parties and partial financial beneficiaries of transactions. That said, the adoption of blockchain as a cure to the disparate, often inefficient transaction IT systems found throughout industry may reduce overhead costs for FIs, thus reducing pass-along costs for customers.

From a compliance perspective, reduced oversight likely leads to higher risks of money laundering and tax evasion. This aspect, in a vacuum, is unlikely to be greeted warmly by regulators without mitigation. Mitigation equals expenditure, which somewhat negates the basis of this economic blockchain benefit. In addition, cultural adoption of blockchain as a replacement for legacy systems will be a challenge, as is the integration of any new technology into large organizations due to costs, complexity, and unfamiliarity.

Complete, consistent, timely, and accurate data

This benefit serves as an enhancing factor to compliance and regulatory oversight. Specifically, the ability to analyze complete and timely data for the purposes of transactional screening (PEP, sanctions, unusual activity) is extremely important for compliance professionals.

Decentralized networks less susceptible to cyber attacks

While there are valid arguments for merging cybersecurity and compliance programs (specifically AML), the all-too-common compliance program silos found in large FIs will reduce the effectiveness of this blockchain advantage. The verdict on this benefit is still out, as the recent increases in global cyberattacks indicate that the attackers tend to adapt their methods to breach new technologies much faster than industries can implement protections. Here, data, account, and transactional protections are vital from a compliance purview, but still unrealized.

Transactional transparency and immutability

Transparency is in the eye of the beholder. The ability to analyze transaction sets is important for FI compliance programs, but transparency doesn’t just mean numbers or raw data. Transparency also includes the transacting originators and beneficiaries, and there are some real challenges in using blockchain to assess the risks of those entities. Blockchain, by itself, does not necessarily eliminate compliance issues related to personal data sharing between FIs, protecting digital identities, or even shedding light on the users of cryptocurrency (which is increasingly being integrated with traditional FIs). However, use of blockchain as a tool in combination with effective regulatory policy and FI compliance programs may greatly enhance the comprehensive transparency of legal and illicit activity.


The fact that blockchain is not easily understood by the persons charged with creating and implementing business and compliance strategy is a roadblock towards utilizing it in a meaningful manner that leverages its full menu of benefits. Likely the hype will subside for the blockchain concept and the usable, effective aspects of it will be parsed out throughout industry and used to improve disparate legacy compliance systems and processes. As with all things, there is likely a middle ground between blockchain perceived (initial hype cycle) as a magic elixir and its perception as another failed technology (eventual hype backlash).


Michael Carter

Michael Carter is an expert consultant and thought leader in the area of financial crimes that includes the Bank Secrecy Act, Anti-Money Laundering, OFAC programs, export compliance, and counter terrorism financing. His Twitter feed curates the latest in #AML#ITAR#FCPA#EAR, and #WhiteCollar crime & #compliance news.

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