The Regulatory Shakedown: The Small and Medium Sized Banking Kryptonite

Trust Can be Decentralized

The current central banking system is composed of largely overweight financial institution that rely on specific revenue stream to ensure their continued survival. The whole system was demonstrated to be largely insolvent in late 2007 early 2008, and this failure damaged the unconscious trust that majority of citizenry had in this debt based monetary and currencies system. In this post I will discuss the blockchain and distributed ledger technology and how they are opening real solutions to many of the more specific regulatory banking problems which followed as a consequence of the Great Recession.

Crisis of Confidence

Working in the offshore banking world had provided me with some insight into how international regulator and banking institutions reacted to this financial crisis of 2008. The compliance and AML costs to maintain a smaller sized bank have gone up steadily over the last 10 years and the “broader compliance trends actually reveal harsher prosecution for smaller banks and money service businesses (MSBs)”1. The fines related to failures of compliance such as Anti-Money-Laundering (AML) and Know Your Customer (KYC) Rules have drastically impacted profitability of honest custodian-based Non-Lending banking institution. The Largest banks in the central banking system have immense pools of client capital and leverage client deposits to pay any fines that may be levied against them. One simply need to look at the deposit ratios of these fractionally reserve banks to get a sense to which they take their custodianship of your funds as primary importance.2. For these banks it comes down to a numbers game in that if the cost to pay the fine is lower than the expected profit from the transgression they will continue to behave improperly. The Foreign Account Tax Compliance Act (FATCA) and the IRS form 1042, also known as the "Annual Withholding Tax Return for U.S. Source Income of Foreign Persons" are squeezing the smaller banks out of this industry due to enormous cost of compliance. All these reactionary measures show a central banking system attempting to solve traditional AML/KYC problems with more red tape and documentation. These government solutions often create massive time and resource inefficiencies which lead to a disincentive for small to medium sized firms to compete and innovate in the banking sector. The rise of offshore banking industry is largely due to the desire to maintain privacy and security over our personal financial information while being able to avoid government provided solutions to largely their own problems. The governments post 2008 has cracked down on traditional banking and corporate structuring methods of ensuring freedom. Despite this crackdown the emergence of cryptographic currencies and the blockchain have come into play at just the opportune moment to continue this trend towards financial decentralization.

Problem Then Solution, The Crypto Counter Attack.

As governments crack down on privacy and security minded market participants utilizing loopholes offered by offshore banks and corporate structuring, a much-needed relief force has arrived in the from of blockchain and distributed ledger technologies. Many of the issues that regulators are bringing up as validation for the violation of your privacy rights in the central banking fiat system are in fact non-issues for crypto related transactional entities and systems. The Global Payment blockchains such as bitcoin and other crypto currencies facilitates the movement of value with “no central mediator between the parties to the transaction, making it economical and removing a single point of failure/risk.”1. Even more important is how Blockchain technology could provide global systems of KYC/AML which would still provide for the meeting of regulatory requirements of banks. This distributed “ledger could also enable encrypted updates to client details to be distributed to all banks in near real-time. The KYC ledger could also provide a historical record of all documents shared and compliance activities undertaken for each client.”2. The blockchain and distributed ledger are providing an alternative to the generic set of technology systems which currently are not meeting the needs of consumers.

Final Thoughts

In this ever-growing volatile world where event outcomes are unpredictable and often marked by chaotic complexity we are all thirsting for clarity of understanding as to the role of the blockchain in securing our liberty and providing freedom to our communities. The post 2008 re-alignment of the central banking monetary system away from its uni-polar fiat USD structure to a multi-polar world which includes a larger renewed role for gold, silver and the newer crypto currencies is currently full steam ahead. It will increasingly become unbearable for small to medium size banks and payment processors to use the traditional technological solutions to resolve the ever-increasingly complex AML/KYC requirements demanded by regulators. This will force firms to provide innovative products ad services that use the foundation of blockchain to provide cost effective solutions for regulatory requirement. I hope to contribute to this innovation as we all would, and the blockchain offers us all that chance should we be willing to walk through that door and take it.