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How Will Blockchain Alter Compliance?

Posted by Jeff Pelliccio on Jun 20, 2018 9:00:00 AM

In ICS insights

In a recent MIT Sloan Management Review article, “How Blockchain Will Change Organizations,” the authors spitball how blockchain practices could lead the corporate world to a new era of business processes, including the compliance function. So, what can bitcoins have in common with following the rules? Let's take a closer look.

How Blockchain Would Work in a Business Transaction

You must understand how the technology behind blockchain could apply to a business process before evaluating its effectivity. What does blockchain mean for a business process? According to the article, a business transaction is the same as a bitcoin transaction. Instead of money, we are transferring documents and other corporate artifacts. Using intermediaries creates trust and ensure the integrity of whatever is being exchanged. In the case of banks and governments, they can positively identify the sender prior to transferring assets, and intermediaries record the transaction. Intermediaries are effective for this role with unfortunate exceptions. Concerns include crash-prone servers, fraudulent transactions, and hackers.

Imagine a secure internet that offered organizations a place to store and distribute items without other intermediaries. Blockchain would give users a transparent means to verify and approve access to encrypted resources. This means that per-transaction costs decrease, and it lowers barriers for entrepreneurs trying to launch into new geographies. Current external resources that provide this security are expensive to implement. 

Where Could BlockChain Offer Value?

Blockchain-based transactions would improve operational compliance in all organizations.

HR

For example, in Human Resources (HR) and Procurement, specialized training is needed to procure potential contractors. Since this type of procurement is typically outsourced to staffing firms, there's a transfer of sensitive information between the parties. An HR representative acquires permission from a potential third-party business partner to access information known to be correct and secure. This data is stored on a secure, distributable database. However, someone must upload, verify, and update those records, which requires a highly priced specialist. On a blockchain system, business partners would still have access but would be prevented from inadvertently or maliciously altering data.

Financial Reporting

In financial reporting, a search moves horizontally across the web and vertically on any website. The information accessed can be untimely or incorrect. On a blockchain, another dimension comes into play. Knowing the sequence provides context to occurrences in the past few moments or transactions. This makes it possible to look at a historical view of an organization from the time it incorporates. 

Analysts can make better-informed decisions when the most recent information is viewed from this perspective. If you have the chance to look through a company's complete set of valuable records, there's a profound promise of transparency that is a game-changer. Off-book transactions and hidden accounts hit the light of day, and you can base corporate decisions on unhidden truths.

Filters are required and could be managed by those responsible for the data. Stakeholders can request reports for the information they want to receive. Ticker tapes and dashboards would finally be available at the push of a button.

Sales

Blockchain could have just as big an impact in your sales department. It would help you delve into companies you might want to go into business with in the future.  Blockchain is particularly valuable when the entity on the other side of the conference table has a state-owned enterprise behind them. That's not all. The same information you receive regarding potential contacts would be available to assess prospective customers. In this case, there are further compliance issues surrounding corruption and collusion. So, any efforts must comply with the Foreign Corrupt Practices Act (FCPA) as well as pass the smell test for anti-money laundering (AML) compliance. Sellers would no longer be required to establish trustworthiness through an app that incurs additional costs.

This makes it easy to complete secure transactions to set everyone's minds to rest regarding security. In short, blockchains make it possible to cut out the extraordinary cost of warehousing data and protecting it from cyber-attacks.

Compliance Implications

Blockchain would serve compliance users by giving them a new way to audit the terms and conditions of agreements that are now found in all third-party contracts. Blockchains have the capability to create long and short-term contracts. These smart contracts are software-generated replicas pre-loaded with the necessary information to execute, enforce and pay companies impacted by the agreement. In turn, companies on both sides can automate the terms in the contract to avoid clerical and other errors or misunderstandings.

The authors of the MIT article surmise that blockchain will prevent many scandals that make the financial news. By codifying ethics and integrity into a software system, a corporation can avoid moral hazards that tempt lone bad actors in decision-making roles. Through smart contracts on a blockchain, shareholders can enforce the commitments executives make for the corporation. Companies can state the specific outcomes and goals required to fulfill the contract. This has legal implications as well since contracts are no longer paper-based artifacts vulnerable to tampering. It increases the risk someone takes in trying to game the system for their own benefit, which is good for everyone else impacted by corrupt dealings.

This final point is that once the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) starts dropping hints about blockchain, it's going to become part of the compliance process anyway. So, why not get a head start? Revolutionize the way you look at storing sensitive documents within your organization as well for further innovation.

Do You Have the Talent?

Blockchain will bring many challenges to compliance and with that comes a need for talent. Do you have the team you need in place to succeed? Contact ICS to find the right talent for the job. You'll be one step ahead of the competition. 

Find Talent NOW

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