February 9, 2021
1.7 billion adults and millions of organizations do not have access to essential financial services; billions more have bank accounts but are unable to use them. Despite initiatives such as the World Bank’s Universal Financial Access program and governmental and industry encouragement, many remain underserved or entirely excluded from the global financial system. For many, the basic societal need to hold monetary value securely, transact for necessities, and transfer money to friends and family is still out of reach.
Thankfully, financial services continue to evolve rapidly, providing new avenues for people and organizations to engage in essential services. Alternative financial technologies (fintech) are bursting into the marketplace, offering innovative products and services to banking participants through direct, smartphone-based, non-traditional channels. The digitization of monetary exchange has also experienced explosive growth, often proving to be faster, more convenient, more privacy-respecting, and more secure than physical transactions.
These trends expand the risk and compliance challenges of money transmission beyond traditional banks to startups, enterprises, and nonprofits/NGOs, which are typically unfamiliar with regulatory scrutiny or essential compliance controls. Global regulators are currently monitoring this transition and looking to ensure existing regulations apply to new fintech players. This transition includes virtual asset service providers (VASPs) and other non-bank financial institutions which act as a conduit for the financially excluded and underserved or those otherwise considered ‘high-perceived-compliance risk.’
According to the World Bank’s ID4D, “People with an ID are more likely to own bank accounts and mobile phones, and financial and mobile services are among the most frequently reported uses of one’s ID.”
Identity verification is at the core of essential financial regulations of Know Your Customer (KYC), Anti-Money Laundering (AML), and Counter-Financing of Terrorism (CFT). Financial governance leaders are recalibrating their requirements to keep up with the pace of innovation to ensure that bad actors do not exploit the financial system and that intermediaries of all types have adequate financial crime compliance (FCC) programs in place.
The fundamental right for individuals to participate in society no matter their origins or circumstance has long been at the core of the Sovrin Foundation’s vision. The Foundation promotes control of one’s own identity to utilize digitally stored credentials to access and engage daily services. While decentralized identity has been a barrier in traditional banking, fintech and regtech have introduced the constructs to leverage digital and self-sovereign identity to drive financial inclusion for tens of millions of outliers.
Indeed, these new technologies provide great promise in modernizing finance, payments, and identity management in tandem. But related regulatory compliance is in equal need of modernization. Traditional legal compliance relies on legacy banking infrastructure. Its growth has forced the sector into a false binary choice: provide incentives for universal access or protect financial system integrity with exclusionary compliance controls. This choice has disproportionately impacted those who are in most need of essential financial services, such as low- or moderate-income families, and access to vital services, such as international remittances. The Covid-19 pandemic has reinforced the importance of such entry to small businesses reliant on support and financially underserved or excluded households looking for relief.
Since 2019, Sovrin has hosted the Compliance and Payments Task Force (CPTF), an open group of traditional bank and non-bank financial institutions, regulators, policymakers, technologists, ethicists, and legal experts. The CPTF has developed and promoted the Rulebook, an innovative best practices framework that extends traditional banking compliance and payments guidance to emerging fintech and VASP processes.
The Rulebook serves to ensure essential global banking compliance while accommodating fintech’s seamless experience and smooth flow of funds for members and reinforcing the application and intersection with traditional banking rails. The Rulebook defines technical standards for end-to-end transaction flows and service-level agreements between parties to reflect the operational realities of an increasingly decentralized and cross-border financial system.
As part and parcel of regulatory compliance to expand the operational focus of the CPTF to serve the Identity for All mission and advance inclusion, the Group has reimagined into the Compliance and Inclusive Finance Working Group (CIFWG). The CIFWG builds on the tactical efforts of the CPTF, with a robust and ambitious mandate: promoting financial inclusion as a critical enabler. CIFWG will monitor the challenges faced by the financially excluded and underserved, focusing on how economic and regulatory technologies, supported by self-sovereign identity (SSI), can bridge the gap between traditional banking compliance and the associative risks injected by innovation.
With the Rulebook as an anchor framework, the Group will facilitate the advancement of financial inclusion and a modernized application of established global banking requirements and the attendant and necessary FCC protocols. CIFWG is also engaging with other international organizations, initiatives, and regulatory-led groups that advance financial inclusion and modern regulatory compliance solutions. Its ultimate goal is to promote access to traditional and non-traditional financial services and highlight the resulting benefits of building economic resilience and prosperity.
CIFWG believes that SSI is a powerful enabler for security, compliance, and inclusion. “Our bedrock approach recognizes that any institution today can be a financial services provider; our job is enabling their full participation in the global banking system,” says Amit Sharma, CIFWG Chair. “Digital finance is not new, although the cryptographic creation and representation of value show promising applications to democratize finance truly. Innovative and modern FCC approaches must meet market innovation. We encourage all who are interested in joining us in the CIFWG to help facilitate a pathway to a more sustainable economic future for all.”2020 – How SSI Went Mainstream An open letter to Financial Crimes Enforcement Network advocating for financial inclusion in its regulations »