Societal and consumer demands are increasingly driving change in financial markets. People now expect simple access to financial platforms and are questioning whether current infrastructure meets their expectations.
While post-crisis reforms have improved the resilience of financial firms, they also bring economic costs. Since the introduction of reporting obligations, banks have been forced to pass those costs on to their customers. The hunt is now on for more efficient ways of working.
“Tackling this issue will require new standards and new technologies,” says Moritz Plenk, head of regtech distributed ledger technology (DLT) at BearingPoint. “Almost every financial institution is using blockchain solutions to enhance contracting processes for a multitude of financial products.”
Very few blockchain networks under development currently have regulators actively involved. As a result, Plenk believes, “they draw too little benefit from distributed ledger environments and digital asset platforms for their monitoring tasks”.
BearingPoint has already established itself as a leader in the regtech sphere through the development of its Abacus platform. But the company has recently created a concept for a modern reporting regime based around a distributed ledger network. Such a system, according to BearingPoint, should improve micro and macro banking supervision.
“If two banks execute a trade in this network, trading counterparties always have identical, reporting-relevant data at the same point in time on their ledgers,” says Plenk. “Because the regulator is a participant of the DLT network, no additional reporting processes are required. The regulator is able to see and extract all validated transactions.”
BearingPoint’s concept, developed with DLT firm R3, embeds regulatory content in smart contracts, effectively automating regulatory reporting. These smart contracts make use of a common data model and “the given logic of regulating authorities” to automatically report data on financial market transactions, says Plenk.
While still in a proof-of-concept (PoC) phase, BearingPoint’s platform has demonstrated that it is possible to simplify banks’ transaction reporting greatly, fulfilling recent European Market Infrastructure Regulation (Emir) requirements by making use of DLT. “Once established as an industry standard, our regime covers all regulatory requirements without incurring additional reporting costs, and enhancing financial market stability,” says Plenk. “This is what makes our regime a game-changer.”
BearingPoint is currently in talks with several European central banks to implement a new DLT-based software package for transaction reporting. With these institutions, the company has conducted workshops to elaborate how regulatory smart contracts and shared immutable transaction reports will transform the regulatory value chain. Having completed the Emir PoC, BearingPoint plans to start a new project in late 2019 or early 2020 with the goal of extending and testing its regime for further reporting obligations with firms and at least one regulatory body.