This article originally was originally published on China.com and translated for our English blog audience.
Blockchain technology has lots of potential and has even been touted to revolutionize business operations globally just like the internet did many years back. To illustrate, we are gradually witnessing the adoption of digital assets as a means of value exchange. However, there are a number of hurdles that have become a challenge to mainstream adoption, especially in industries where regulation is important.
Regulation and Compliance: Challenges to Blockchain Adoption
In the face of this growth, there are still some challenges with potential to negatively impact the adoption of blockchain technology in the business setting. For one, compliance and regulations still rank as a top hindrance against wider adoption in the enterprise setting.
Blockchain technology appears to be a laudable solution to regulation and compliance, as it provides a platform for immutable record keeping and transparency. However, the industry in itself is plagued with challenges regarding compliance. Blockchain is expected to scale globally, but with inadequate regulatory frameworks, such prospects face heavy limitations.
The regulation of digital assets, for instance, remains a major challenge. Some countries like Pakistan, Iran, Morrocco have placed an outright ban on the use of such technologies, while some other countries have put in place some form of regulation. Absence of proper regulatory frameworks have led to unprecedented market manipulations, which negatively influences the level of trust in the ecosystem.
Solutions to Ensure Compliance
To facilitate trust and confidence in the blockchain ecosystem, the importance of implementing regulatory and compliance frameworks cannot be overemphasized. This may seem an uphill task, but the possibility of effectively implementing permissioned blockchains with high compliance standards in an enterprise setting is achievable. However a number of approaches need to be embraced.
Enhanced Analytics and Monitoring
The blockchain ecosystem is largely faced with inadequacy in terms of how blockchain companies, digital asset exchanges, and the industry in general address data in their platforms. This leads to a limitation as to how quickly any movements across the blockchain can be addressed — especially illicit or unwanted ones.
In addition, the lack of standards in the ecosystem leads to a challenge in the perspective of compliance to any such standards. The majority of exchanges are plagued with various irregularities ranging from lack of transparency, scams, to subtle market manipulations. Reports showed that nearly 95% of all reported trading was artificially created by unregulated exchanges, thus inflating the volume of the trades. Several exchanges are engaged in wash trading, spoofing, front running and several other irregular activities that artificially increase transaction volumes, and can thus affect the speculative value of some digital assets.
Adequate market surveillance is a key factor in ensuring compliance. This will prevent irregular activities like fraud and market manipulation in the ecosystem thus ensuring a commitment to regulatory frameworks. PARSIQ is one such company that has committed to compliance and regulations, having developed comprehensive analytics and monitoring tools that would facilitate proper market surveillance.
“The growth of digital assets and other blockchain-derived technologies is currently stunted by a lack of tools to monitor blockchain transactions.” says Alan Durnev, PARSIQ CTO. “Currently available tools, like block explorers are lacking the automation and deep analysis features necessary to perform quality monitoring of blockchain at scale and in real-time. Right now, the effort and complexity associated with block explorers means that blockchains remain opaque.”
To ensure compliance, PARSIQ provides a comprehensive and modular blockchain analytics platform that offers real-time analysis by parsing both historical blockchain transactions, unconfirmed transactions, and other data across different chains.
This will also serve as a means to track and curb money laundering activities that have become rife in the blockchain industry — a step which will be in compliance with Anti Money Laundering (AML) laws.
Incorporating Effective KYC/AML Procedures
Know Your Customer is a very important compliance tool not just in the blockchain industry but also in the traditional regulated industries. KYC helps businesses, exchanges and concerned establishments ensure they are transacting with legitimate clients. Hence it is important that clients go through these procedures to ensure compliance.
However, these procedures often come with costs to the organizations, financially and in terms of personnel and time. Traditional KYC procedures sometimes take several days to be completed.
Although blockchain technology helps to streamline this process, there’s also the issue of cross-chain interoperability. Clients who go through KYC procedures on one blockchain platform may have to go through the same procedure on another blockchain considering different chains follow different protocols.
Thus there are significant advantages in incorporating effective KYC frameworks applicable across various chains. A number of blockchain companies in recent years have realized this need and have developed KYC frameworks to facilitate seamless cross-chain solutions.
Blockpass, for instance, is a user-focused, user controlled mobile identity application designed for smooth and immediate access to regulated services. Blockpass is a know-your-customer (KYC), anti-money-laundering (AML) application as-a-service. KYC procedures need to be accomplished only once, and this can be used across different platforms. Clients need not repeatedly go through KYC process again.
Hans Lombardo, CMO, Blockpass, believes compliance is an important factor for the success of the blockchain ecosystem. “One of the biggest issues faced by institutions is compliance. Being able to do KYC online and checking compliance is an ongoing concern, especially for financial institutions.”
Thus, for enterprises to effectively be compliant, they need platforms that will facilitate interoperability across their various sectors. This is one of the main reasons they created a KYC/AML blockchain framework that would enhance compliance via interoperability.
A key factor for accelerated adoption of blockchain is trust. Enterprises need to be able to trust that the ecosystem is reliable and operations via blockchain are secured to a very large extent. Putting in place relevant frameworks like effective analytics and monitoring to prevent illegal activities and ensuring KYC/AML are followed certainly instill confidence in players in the market.
Regulatory Frameworks: A key to Blockchain Success
Regulatory frameworks significantly contribute to the success of blockchain companies. Thus it is important that blockchain establishments ensure and maintain commitment to regulation and compliance. Paxos for example has displayed this commitment for a number of years. As a regulated financial institution facilitating movement between physical and digital assets, it became the first financial institution to be approved to operate in digital assets globally.
According to Chad Cascarilla, Paxos Co-Founder and CEO, “blockchain will transform the way value and assets move around the world. However, in order to enable that transformation in the world of finance — and succeed — regulation must be adhered to or suffer the fate of companies … that failed.”
“Because we are a financial institution with an expertise in blockchain and digital assets, we can act as a bridge between traditional assets and digital assets. This is how we’re able to make progress and introduce innovative technology to an industry that is very complex and heavily regulated,” adds Dorothy Chang, Vice President of Marketing and Communications at Paxos.
Blockchain’s potential to transform business operations on a global scale remains undoubted. Although there may be a number of challenges due to its current developmental phase, these challenges properly addressed, will serve as springboards for the acceleration of its global adoption.