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COMPLying IN a BLOCKCHAIN AGE When blockchain, cryptocurrencies, and AML meet, banks must rethink BSA/AML practices By Joseph Mari, Bank of Montreal


ver the past year, blockchain has become the buzzword for major financial institutions, and while its capabilities and purpose continue to evolve, its basic concept of a shared ledger has become mainstream. But there are ramif ications beyond technology and new ways of doing business. There are compliance implications. However, let’s get everyone on the same page first.

Solution for everything? Blockchain is a technology platform that enables multiple parties to view and update an immutable, shared ledger. The ledger can be decentralized or distributed, meaning that it can be open or closed. A similar comparison is the internet versus a private intranet. In concept, this seems simple enough. But blockchain has excited people’s imaginations, and advocates for the technolog y suggest endless possible applications that reach far beyond the financial services industry. Do you want to lease a car? Blockchain can help. Are you looking to identify thousands of undocumented migrants? Try leveraging blockchain. Are independently thinking machines threatening humankind with nuclear war? Release the blockchain. That last one is in jest, of course, but you get the point. The jury is still out on whether or not blockchain technology can live up to high expectations. However, the uncertain future has proven to be one of its most valuable marketing points, with nearly every major financial institution pledging allegiance to a blockchain-inspired consortium aimed at tapping its potential. At the same time, the uncertainty acts as an Achilles heel, providing ample fodder for skeptics. Regardless of which camp one belongs to—if one has chosen a camp—the technology does work and is already being used on a daily basis by thousands of people around the world via decentralized cryptocurrencies, such as Bitcoin. This rise in cr y ptocurrency usage,

along with the exploration of blockchain solutions for traditional banking services, puts anti-money laundering (AML) professionals on the front line of a possible tipping point event—one which requires a re e va luat ion of t ra d it iona l A ML methodologies that will not only allow regulatory adherence, but technological innovation and marketplace growth.

Bitcoin’s challenges While 2016 was blockchain’s year, it definitely was not the year for its largest proof of concept, the cryptocurrency network known as Bitcoin. Understandably, referring to Bitcoin as a proof of concept may be viewed by many as an understatement. However, when it comes to blockchain technology’s adoption by international financial institutions, Bitcoin’s approximately $10 billion market cap and limited transaction execution rate relegate it to the level of a science project by many in the financial services industry. T h i s d i sm i s sive at t it ude t ow a r d Bitcoin occasionally spills over onto blockchain, although this has decreased over the past year due to increased focus on the technology as a whole. AML professionals do not have the luxury of brushing aside any aspect of

blockchain, especially cryptocurrencies. This is primarily due to the year-overyear increase in cryptocurrency usage. According to Crypto-Currency Market Capitalizations, there are currently 645 cryptocurrencies in the world, with a combined market cap of $12.5 billion. While this does not seem like much when compared to the total value of American dollars or British pounds in circulation, it is impressive that currencies issued virtually, devoid of any central bank, have attained this level of valuation. Note that a lthough decentra lized cryptocurrency is created outside a central bank, it does not operate entirely in a vacuum. Cryptocurrency is being exchanged daily for traditional fiat currency, with many of these transactions being facilitated through traditional financial institutions. Furthermore, a significant amount of transactional cryptocurrency activity has been tied to criminality worldwide, including money laundering.

Crypto transaction varieties Cr y ptocur renc y tra nsa c tions operate largely w ithin two separate environments: contained and interactive. This has been discussed in depth by international AML professional Peter

December 2016/January 2017



December 2016 January 2017 Banking Exchange