In a new report, the Economic Commission for Latin America and the Caribbean (ECLAC) has stated that blockchain technology could offer potential solutions to some of the problems surrounding de-risking and the navigation of correspondent banking relationships.
ECLAC, headquartered in Santiago, Chile, is one of the five regional commissions of the United Nations. It was founded with the objective of contributing to the economic development of Latin America, coordinating actions directed towards this end, and reinforcing economic ties among countries and with other nations of the world.
In an online post, ECLAC explained that de-risking means the practice in which banking institutions turn away from working relationships and lines of business for which the cost of regulatory compliance is considered to be too high as compared to the returns. While this phenomenon is affecting developing economies across the globe, countries of the Caribbean are the ones that have been hit the hardest.
In the latest report, ECLAC said that blockchain technology may offer an alternative means for financial service institutions to support cross-border transactions.
“This technology appears to have the potential to address the problem of de-risking on two fronts. Firstly, an appropriately designed blockchain-based settlement network would offer tools to improve surveillance of transactions, which would enable the detection of illicit financial transfers and thereby decrease risk and associated compliance costs. Secondly, a blockchain-based network would offer Caribbean banks the opportunity to bypass correspondent banks altogether, thereby reducing transaction costs and increasing efficiency", it said.
However, the report noted that there are still a number of issues which must be contended with before the technology is ready to take a major role in providing relief to the correspondent banking problem. This includes the need to address concerns over consumer protection, privacy, and compliance with international financial guidelines.
