Why AI and Blockchain Are About to Transform Compliance

Any fintech founder will tell you that compliance is important — that’s because it is. But in today’s world of unparalleled financial innovation, whole new currencies, entirely new payment methods and borderless money, compliance is not nearly the most exciting topic.

For money to move, however, it needs to be compliant. Whether we like it or not, compliance is a necessary consideration that, if done incorrectly, could result in hefty fines.

It’s, therefore, no surprise that organizations continuously find ways to delegate compliance responsibility. Realistically, this is where most major banks that have received headline-worthy fines for non-compliance have faltered. It’s also no surprise that, as an industry, we’ve found ways for AI to streamline these processes for us.

The fact of the matter is that compliance is made simpler through the integration of artificial intelligence technology. But the real promise of compliance innovation isn’t just the application of artificial intelligence; it’s the integration of blockchain technology and tokenization — technology that isn’t being widely used yet in the traditional finance industry.

Related: How AI Revolutionizes Compliance Strategies, Shifting Them From Reactive to Proactive for Global Success

Achieving compliance with AI

When you boil fintech compliance down to its fundamental principles, it rests on thorough AML (anti-money laundering) and KYC (know your customer) screenings. These protocols have been in place since the dawn of financial record-keeping requirements in the 1970s and have been compulsory for organizations ever since.

AML and KYC processes involve heavy levels of paperwork; rigorous background checks are required of banking customers and vendors, and a meticulous eye on transaction activity must be maintained constantly to make sure no suspicious or illegitimate activity is processed.

It’s these tedious and time-consuming processes that are the most automatable through the application of AI. AI models are able to detect anomalies in transaction activity on a 24/7 basis to quickly flag and respond to suspicious activity. The promise and realization of real-time compliance monitoring have a positive impact on fintech’s ability to keep up with compliance requirements. A diversion away from reliance on human monitoring leaves much less room for error and saves company resources, too.

AI is also able to efficiently cross-reference user applications with requirements and provide the necessary approvals for customers to be onboarded quickly. More than that, when routine re-verification is required, AI is able to automate this to facilitate KYC renewal checks automatically — streamlining the process and fulfilling the requirement in the background.

The next level of compliance

But if we look even beyond AI, there’s a new and exciting wave of compliance technology on the horizon that will further transform the way fintechs and broader industries are able to follow compliance requirements. Blockchain technology, as it continues to revolutionize finance as we know it through the advent of regulated stablecoins, CBDCs and broader cryptocurrencies, will eventually infiltrate wider operations in the fintech sector, including compliance.

It’s the core principles of blockchain technology, such as tokenized information, immutable ledgers and private/public cryptography that make it such a game-changer for compliance.

The concept of tokenization doesn’t just apply to assets; tokenizing information allows companies to translate personal identifiable information (PII) — critical information for the KYC and AML screening process — into encrypted code, which can be shared between financial organizations and vendors as a means of verifying someone’s identity and therefore the transaction.

The benefit of tokenizing the information is that personal information can be verified from one organization to another without revealing PII. It removes the need for constant data-sharing requests while preserving the data’s privacy and integrity.

Related: 6 Ways Automation Can Eliminate Your Company’s Compliance Risks

All of this is performed on an immutable ledger. That is, a record that is unchangeable and permanent, a hallmark of transparency that complies with requirements for regulatory oversight and audit processes. The digitization of this ledger propels financial institutions out of manual record-keeping processes and into a world where transaction information is more standardized, accessible and transparent.

This technology is already being implemented today and will continue to redefine how organizations treat and achieve compliance moving further into the future. AI and blockchain technology in themselves drive significant impact on facilitating compliant transactions, and together, the benefits scale dramatically.

When we think of compliance, many people still think of a drawn-out, tedious process, but AI and blockchain technology will soon say goodbye to that perception, ushering in a new era of efficiency, accuracy and automation — and it’s about time.