SINGAPORE (Nikkei Markets) -- Three major banks are joining forces in Singapore to build a customer identification and verification system using blockchain technology, potentially lowering compliance costs as lenders step up efforts to combat money laundering and terrorism financing.
Oversea-Chinese Banking Corp., HSBC and Mitsubishi UFJ Financial Group, together with Singapore's Infocomm Media Development Authority, successfully tested a "proof of concept" prototype, which shows an idea is feasible, between February and May 2017. In a joint announcement on Tuesday, the four parties added that they are the first consortium in Southeast Asia to complete such a test.
An OCBC spokeswoman said the consortium would now explore the possibility of testing the system on a larger scale with other partners.
Currently, individuals and companies are required to submit a set of documents whenever they start a new relationship with a bank as part of regulatory requirements. Verification of the documents involved in the "know your customer," or KYC, procedure can take weeks, making the process laborious and inefficient for both banks and customers.
By using a distributed ledger technology platform, which is the underlying technology behind blockchain, the information can be collected and verified just once if customers consent to the sharing of data.
Information encrypted on the shared ledger can be easily validated by referring to government registries, tax authorities and credit bureaus, while banks can also store secured digital records of the validation process on the shared platform to streamline auditing and regulatory reporting.
OCBC, HSBC and MUFJ said their tests earlier this year showed the prototype system remained stable even with a high volume of information flow. The system was also resistant to tampering by third parties, while confidentiality was maintained as access to the ledger required authentication.
Singapore has been encouraging banks and financial technology companies to use the city-state as a base to develop and test new systems. In August 2015, the Monetary Authority of Singapore set up a special group whose functions included developing strategies to facilitate the use of technology and innovation in the financial sector.
"The MAS has spoken about the importance for Singapore to work smarter in how it fights financial crime...The launch of this KYC platform is an accumulation of all of these aims: collaboration, innovation and crime prevention," said Beaver Chua, head of financial crime compliance at HSBC Singapore.