Ramifications of Blockchain and AI in RegTech

Today’s Indian market is thriving with acquisitions, investments, and private equity funds targeted at start-ups. This not only increases pressure on regulatory bodies due to massive fund-flows (in/out) but also on foreign entities entering the domestic market, unfamiliar with the regulatory framework. This bottleneck makes RegTech appealing to both, players entering the market and regulators regulating the market. RegTech is the bundle of technologies that make regulatory and compliance activities easily understandable and easier to comply by automating redundant and simplifying complex tasks, thus, avoiding heavy penalties. At this juncture, RegTech truly serves as a game changer.

Technologies that broadly impact the financial services space include: Predictive Analytics, Artificial Intelligence, Machine Learning, IoT, Social Media Data, Telematics, Chatbots, Humanoids, and Drones. These emerging technologies could be leveraged optimally to benefit regulatory hiccups. Diving in within RegTech reveals the following regulatory areas that technology firms target via a suitable mix of the above technologies:

Blockchain is probably the ‘Top 5’ most exploited terms in today’s era in lieu with words like digital, transformation, and disruption. The aspect that made Blockchain popular also made many people run away from it – Bitcoin. Bitcoin, infamous for money laundering / trafficking is slowly making its presence felt across the BFSI space through POCs and Conferences catered specifically to educate, sensitise and evangelise the benefits of adopting Blockchain. However, it is imperative that one understands the basics of Blockchain before plunging into its applications. The ramifications from a compliance and authentication perspective are tumultuously disruptive within the regulatory space as intermediaries could and will go redundant overnight. It’s high time we stopped hallucinating and getting paranoid over potential jobs that could be lost and dove into aspects that could be disrupted via the right mix of technologies in RegTech.

While analysing different touch points that customers interact with, it is evident that AI has been most adopted on consumer facing chat-bots and data processing mammoth tasks that reduce manual labor and improve accuracy. However, the real benefits to the optimal use of AI and Blockchain is their use on self-learning crisis management policies which could complement and prepare regulatory institutions for events oscillating from cyber-crisis to flood-crisis and financial-crisis to name a few. The moolah (money) saved via a proactive approach rather than a reactive approachis justification enough to adopt this technology with open arms and embrace the disruption that may emanate. There are initiatives currently in the market where regulatory bodies are creating massive databases with common queries that customers have related to regulatory procedures or compliances. For Example: Some capital market facilitators have created AI-Enabled FAQ Bots to facilitate real-time queries on trades and thus reduce overall turnaround time on trade lifecycles which could have direct implications on overall market liquidity.

Some of the possible RegTech applications include automated risk management and compliance processing, staying updated on regulatory changes around the world, facilitating regulatory reporting, and supporting strategic planning. One must, however, exercise caution on four categories of risk to minimise exposure and maximise potential benefits: uncertain development paths, limited judgment due to rapid replication of errors, privacy, and increased scrutiny.

RegTech is still in its infancy stages in India but the next 2 to 5 years would mark an increased demand for them and thus hopefully establish the supply of several RegTech firms operating in this realm.

Denis Thomas
Director, Banking and Capital Markets, Capgemini