The cost of anti-money laundering (AML) protocols and procedures for businesses is well-documented.

Financial institutions sink billions each year into technology to identify suspicious activity and prevent their services being used for illegal transactions.

Despite these efforts, money laundering remains big business, representing around five per cent of global GDP. That’s larger than the entire economy of Canada.

In its early days, many feared that blockchain technology – and the crypto assets that it became synonymous with – would provide yet more protection for money launderers, cloaking assets behind a wall of anonymity. 

However, with the emergence of new generations of blockchains and cryptocurrencies, like Facebook’s libra which was announced in June, we may now have an opportunity to build an asset that can prove itself a weapon in the fight against financial crime, rather than a facilitator. 

The way in which banks currently approach money laundering is largely reactive, relying on electronic monitoring to identify suspicious activity such as excessively large cash deposits.

The problem is that information is often kept across multiple systems, giving neither banks nor regulators a comprehensive view over the whole network of interconnected payments, deposits and money transfers. 

The nature of blockchain, as a single connected ecosystem, means that information can be shared across a network, enabling banks to develop a more coherent and comprehensive view of activity. 

This enables AML analytics to build up a much more subtle picture, joining together activities which might not on their own seem suspicious, but taken as a whole indicate nefarious activity.

So, if blockchain can actually enhance AML measures, why is libra – and cryptocurrency more broadly – seen as such bad news in the fight against financial crime?

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The key is to understand the difference between a permissioned blockchain, which requires users to be verified before they can join the network, and permissionless block-chain, which offers none of the same protection. Bitcoin, the most famous cryptocurrency which is often confused in people’s minds with blockchain itself, is the latter type. 

Permissioned blockchains are by far the most effective way for the technology to deliver on its AML requirements. By creating an ecosystem that ensures participants have valid legal identities and where confidential data is safeguarded, this kind of network has the ability to deliver privacy and security at scale. 

Cryptocurrencies, and blockchain in general, have become a victim of this little known and lesser understood distinction between permissioned and permissionless networks. 

With libra facing intense regulatory scrutiny, Facebook now has a unique opportunity to change that, and deliver on its ambition to advance AML enforcement in the digital currency industry. 

If built on a secure foundation of permissioned blockchain, the asset could can set an example for future coin issuers, and in doing so create new industry standards.

Main image credit: Getty



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