Regulation Technology (RegTech) is one of the fastest growing sectors of the software and technology industry for good reason. Banks, private equity, hedge funds, and other financial institutions are often able to reduce compliance costs and expense by up to 50 percent with proper implementation of RegTech solutions. The question is, where is the RegTech market headed next, and how will funds, managers, and administrators potentially benefit?
RegTech spending is already generating significant momentum, set to increase from 4.8 percent of regulatory spending in 2017, to 34.4 percent by 2022. A large part of this investment stems from the sheer volume of people, finances, and resources that financial institutions spend on regulatory compliance on an annual basis. Financial institutions like Citi often have upwards of 30,000 people employed in their compliance staff, and that’s just one of the tens of thousands of major financial institutions that deal with regulatory issues on a consistent basis. Just imagine if this staffing level could be reduced by 50 percent, a single large bank could save somewhere around $1.2 billion per year (based on the average wages of regulatory staff).
In an effort to ease much of the cost and complications associated with regulatory compliance, banks, funds, and institutions are investing heavily in technology to streamline the process. One of these technologies that’s currently emerging to be a game-changer for funds across the board is the underlying software architecture of cryptocurrency, known as the Blockchain. Big banks are already exploring crypto and blockchain initiatives with technology partners, innovators, and startups, and as they progress the blockchain promises to truly reshape RegTech.
1. Enhanced Security
There’s a reason why the RegTech market stands to increase from $10.6 billion in 2017 to $74 billion by 2022. That 48 percent compound annual growth rate (CAGR) is going to be driven by many factors, and the need for data security in the compliance process is one of the most important ones. What blockchain technology does for funds is to remove data security as an excuse for siloing data across various applications or departments.
Due to the distributed, secure nature of the blockchain, regulatory processes, data, and documents can be shared across departments and individuals with little to no security concern. This allows for complete interoperability without any of the security concerns of other SaaS solutions. Documents that need to be completed by legal then approved by fund administrators, for instance, can pass back and forth seamlessly between departments without any data security concerns.
2. Process Digitization
As most administrators can attest to, administrative and regulatory processes in many funds are burdened with antiquated and inefficient processes. This includes heavy use of paper, PDF, and spreadsheet (PPS) docs that need to be handled, worked on, and processed by multiple internal and external stakeholders. This not only costs funds in terms of processing efficiency but also eats into bottom line operating profits.
Utilizing the blockchain in a variety of RegTech related processes reduces the reliance on PPS, for both mid and back office departments and personnel. By replacing these kinds of archaic processes with digital, auditable workflows, regulatory and compliance practices are set to undergo a major sea change as the blockchain becomes more prevalent. By combining the process digitization capabilities of the blockchain with cloud hosting, funds will begin down the path of eliminating PPS and other antiquated processes altogether.
3. Document Tracking
As processes, paperwork, and documents move to a cloud-enabled blockchain, funds will also be able to better store, track, and retrieve key information as well. This will be especially useful for those in a hedge and private equity fund, where deal and transaction data is flowing back and forth on a consistent basis.
One can imagine a future where sellers own the entirety of information involving a deal on their own private blockchain. Subsequently, the investment bank on the transaction would have a centralized location to track, in real-time, ownership of key documents. Leveraging the blockchain for document tracking promises to streamline transactions and deals while maintaining the necessary level of transparency and regulatory compliance.
4. Internal & External Management
Finally, the blockchain promises to facilitate better internal management and communication for both fund administrators and their limited partners. This goes for managers at hedge funds, private equity firms, or venture capital funds. Fund managers will be able to use the blockchain to better communicate, collaborate, and transfer funds with their limited partners or other external stakeholders. An internal private blockchain at a fund could also be used to track quantitative based performance reviews and compensation.
While there are skeptics that might deem blockchain technology too forward-looking for an industry steeped in PPS processes and legacy technology, there’s no doubt that big banks and major funds are wising up to the opportunities. Once funds begin seeing the tangible benefits of process digitization and document tracking on the blockchain and realizing that it’s totally secure in the cloud, how the financial community views RegTech will never be the same.
