The rise of Facebook as a global social media behemoth has been marred by backlash over its advertising practices and mismanagement of user data, shifting its motto of “move fast and break things” to “move fast with stable infrastructure”. The same shift can be seen in Southeast Asia, with regard to economic growth.
Southeast Asia, led by Indonesia, Malaysia, Thailand, the Philippines, and Vietnam as its five largest economies, is grappling with the need to balance a business-friendly environment that attracts foreign investment with the need for regulation. It is imperative that regulatory infrastructure becomes a part of the region’s equation for economic development, lest it risk setbacks from financial instability.
In the fallout of the international 1Malaysia Development Berhad (1MDB) corruption scandal, Southeast Asia’s financial institutions have paid a significant price.
Based on the report “The True Cost of AML Compliance” issued by global analytics provider LexisNexis Risk Solutions, the cost of regulatory compliance borne by financial institutions operating in the region is projected to increase by 9-10% in 2019. But in addition to compliance costs, there remains the ongoing problem of security.
An April 2019 report issued by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the global provider of secure financial messaging services, noted that Southeast Asian banks are the most popular targets for criminals. According to the report, fraud involving the region’s financial institutions constituted 83% of fraudulent financial transactions in 2018 and 2019.
A significant segment of financial fraud is digital. The 2019 report “Fraud Rising: How Bots and Malware Are Compromising APAC’s Apps” issued by AppsFlyer, a US-based mobile marketing analytics and attribution company, revealed that digital fraud, particularly bot attacks, accounted for 40% of losses reported by banks in the Asia-Pacific region.
According to the report, the scalability of Southeast Asian financial markets and the high rate of internet penetration in these countries were the primary factors behind the vulnerability of its financial institutions to digital fraud. Though cryptocurrency use in Southeast Asia could exacerbate the existing vulnerabilities of its financial systems, the underpinning technology of blockchain should be considered for enhancing the systemic security of financial networks.
A milestone in blockchain use for finance security in Southeast Asia was reached in October 2017. Singapore’s Infocomm Media Development Authority (IMDA) joined hands with OCBC Bank, HSBC, and Mitsubishi UFJ Financial Group (MUFG) and successfully undertook a Proof-of-Concept (PoC) for a Know-Your-Customer (KYC) blockchain platform.
This opened the door to using blockchain to strengthen Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) compliance among Southeast Asian financial institutions. The technology has the potential to reduce AML/CTF compliance costs, while addressing the region’s vulnerabilities to financial fraud. The PoC was shown to be highly tamper-resistant and was able to secure confidentiality using cryptographic authentication, allowing only those with legitimate authority to access records.
The use of blockchain in the banking and finance industry raises the issue of the admissibility of blockchain-based evidence in a court of law. Within Southeast Asia, there appears to be no legal precedent. However, the Supreme Court of China in September 2018 passed a landmark ruling that blockchain records are admissible evidence in the country’s internet courts.
Similarly in the United Kingdom, the Legal Statement on the Status of Cryptoassets and Smart Contracts published by the UK Jurisdiction Task Force (UJTF) in November 2019 provides that smart contracts are recognized as legally valid and enforceable under the laws of the UK. The UJTF statement holds implications for Commonwealth countries such as Malaysia and Singapore, whose legal jurisdictions adopt the common law position of the United Kingdom (UK) as persuasive authority.
The legal recognition of electronic records, including tamper-resistant distributed ledgers, could become another step forward in the age of digitalization, replacing costly and time-consuming paper-based documentation.
Today’s globalized marketplace has placed new competitive pressures and external threats on every industry worldwide, including banking and finance in Southeast Asia. The region’s financial institutions must therefore explore emerging technologies such as blockchain for competitive advantage as well as to neutralize new threats arising from financial digitalization and digital fraud.
Southeast Asian banks must confront the fact that blockchain and cryptocurrency are but two sides of the same coin. As cryptocurrencies gain wider use among Southeast Asians, so too must blockchain solutions be developed as industry tools for compliance and security.
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