The world is an increasingly connected place. We expect to be able to speak, work, watch and play with whomever we want wherever and whenever we are. The world of finance has, likewise, become more connected. Even immovable objects such as real estate are now global asset classes, with people and multinational organizations buying properties they may never see.
However, asset managers now face ever expanding regulations from global authorities, forcing them to either limit cross-border activity or expend significant resources to meet the burden. This in turn results in higher fees passed on to investors, or the limiting of activity across domiciles.
Firstly, the obvious; requirements and processes vary from country to country, and even when there is international or bloc harmonisation (such as across the EU), local rules and exemptions still exist. Traditional techniques, such as annual training, are not sufficient in the global marketplace; firms now find themselves in situations where deals may occur across multiple jurisdictions, and no annual training can effectively prepare any compliance professional to know the laws and bye-laws of all jurisdictions at any given time. Trying to understand and ensure adherence to international legislation is a significant challenge, especially as these regulations change frequently, which makes product distribution notoriously difficult.
Secondly, the audit trail has expanded significantly, as financial institutions must now keep even more detailed records than before for a much longer time. The fines for noncompliance for this and other regulations continues to rise; financial services firms have been hit with over $36 billion in fines since the financial crisis. These fines, in addition to the cost of adherence add up; even a simple rule requiring the translation of a document into the home country’s language can be an expensive and time consuming task.
Finally, the industry has largely failed to keep up with technological trends. Processes are often manual, with many still required to be done by hand or on paper, and expertise can be concentrated on one or a few individuals who head up the compliance department.
On an immediate level, this means that firms are exposed to employee departures and mistakes. However, looking into the future, it also means those same financial institutions are in danger of missing out on the next generation of investors, who expect to be able to access information at their convenience. These investors are also not used to having to wait for processing delays, and are well-informed enough to quickly switch to challenger tech-first alternatives. Ant Group, an affiliate of the Alibaba Group, was one of the first harbingers of this trend, bringing hundreds of millions of retail investors to the Yu’e Bao wealth management platform, making the Tianhong YuE Bao Money Market Fund at one point the world’s largest money market fund.
All of this means that both the demand and cost of cross-border activity continues to rise.
Digitization of assets has been attempted by other blockchain projects. There are various issues with current and proposed offerings. These include:
- Competing blockchain standards and lack of interoperability in many cases
- Being built from a crypto first perspective, which immediately precludes institutional participation owing to the failure to meet compliance and regulatory requirements, as well as the irreversible nature of most blockchain projects
- The attitudes towards, and various standards adopted by, different jurisdictions with regards to digitization and blockchain, which makes cross-border activity impossible for many institutions and asset classes
How can we reduce the financial burden to companies in meeting this regulatory oversight? By leveraging new technology and utilising more efficient processes. Financial firms cannot avoid cross-border capital raising and investing, nor can they roll back the compliance rules introduced in the wake of the financial crisis over a decade ago. But they can eliminate many of the inefficiencies that currently plague the industry, namely the lack of automation that means too much is processed manually.
What financial institutions need is assistance with product distribution, marketing compliance and access to digital legal opinion. This is where we believe AllianceBlock can help.
The AllianceBlock Protocol is built upon three layers. Detailed fully in our whitepaper, these layers combine to solve many of the greatest challenges institutions face, including cross-border compliance.
Indeed, so pressing is the issue of regulation of cross-border activity, one layer of the protocol is dedicated to it. The Cross-Border Regulatory Compliance Layer (CBRCL) will ensure that product and fund distribution, as well as marketing compliance, is simplified by making authorized issuances and trades available only to the relevant issuers and investors. Different countries have wildly different rules governing exactly what fund managers can say, as well as how they can share and promote their funds. This covers everything from wording covering performance to a fund manager discussing their fund on TV or online.
Our solution works in two ways. Firstly, regulation is coded at the layer-level. This means that once a rule has been created or amended as smart contract logic, then subsequently accepted through a voting process by various compliance and legal entities, it comes into force and firms have to adhere to its logic.
Secondly, AllianceBlock performs initial suitability and onboarding checks as part of the CBRCL, meaning that investors are validated against Know-Your-Customer (KYC)/Anti-Money Laundering (AML) and Due Diligence (DD) checks and risk assessments. This means, in conjunction with the wider protocol, that we can facilitate cross-border transactions in a completely regulated and compliant manner which automates and simplifies processes while reducing costs for financial institutions.
Furthermore, as the smart contracts can be amended by vetted authorities that reach authority consensus across the protocol, they can be upgraded to meet regulatory changes. In thisway, we can make changes in compliance requirements directly at the layer-level in conjunction with the regulators themselves, again simplifying greatly the process for firms because they do not need to know every rule — if it is not allowed, they won’t be able to do it.
Finally, AllianceBlock also offers the whole range of expertise and assistance from traditional advisory services to pricing, investor sourcing, and book building. Companies will have access to unbiased and expert advice, including legal opinion.
There are other benefits to using AllianceBlock, including privacy and verification — both also vitally important, especially with developments such as the EU’s General Data Protection Regulation. Taking advantage of the transparency of blockchain technology, all events can be captured on the database to allow for tracing and querying — without exposing any user identities (unless required by regulatory requirements).
Furthermore, through zero-knowledge proofs (ZKPs), we can also comply with data privacy laws while being error-proof. This allows institutions to perform verifications such as KYC, AML and DD both quicker and at a fraction of the existing cost. Our solution offers both the possibility of using these ZKPs where it makes sense — such as for a DApp — that do not have to adhere to the same levels of regulation as more traditional finance based companies. More information on this can be found about this in our whitepaper.
Capital is too globally dispersed and in seek of opportunities outside of home geographies for cross-border activity to relent. Indeed, it will inevitably continue to rise. This new wave of investors, used to on-demand and instant activity, will want to be able to invest easily and without barriers across borders, providing an opportunity for those quick enough to seize it.
Firms that do not adhere to regulations will fall foul of the ire of regulators and governments sooner or later. However, companies that are unable to turn compliance oversight from a burden into a competitive advantage will also find themselves failing, as the market simply passes them over for more efficient and investor-friendly companies.
This is where new technologies and products such as ours can help, by improving inefficiencies and lowering the heavy costs associated with meeting these rules. Blockchain is one technology being heavily explored to increase efficiencies. AllianceBlock is able to unlock the power of asset digitization, by facilitating an infrastructure through which only compliant issuers and investors can engage with, and all transactions and counterparties are subsequently compliant as they adhere to set regulatory requirements built into the protocol. Through this, we will be able to build a globally compliant decentralized capital market.