Executives looking to apply blockchain to financial services believe the technology could reduce the threat of data breaches, a concern of regulators worldwide.

That’s why they are paying attention to the increasing number of “sandboxes,” where regulators allow financial technology startups to conduct pilot programs under official supervision with the goal of fostering a hospitable environment for innovation without creating unnecessary risks.

Whether or not U.S. regulators are justified in their hesitation to fully support distributed ledger technology, there is still a need for caution. 

A “Fintech Trends” panel took on the issues of security and sandboxes during Fintech Week New York 2018. Fintech Worldwide launched the conference series in 2014, and blockchain has been taking an increasingly important role at the events.

Moderator Helene Panzarino, a managing director at Rainmaking, kicked off Thursday’s panel discussion by mentioned a recently released U.S. Treasury report on nonbank financials, financial technology and innovation. In it, the department encourages innovation by financial firms and a more streamlined regulatory environment. But the report also stresses the importance of safeguarding consumer data.

Panzarino prompted panel members to provide ideas on how blockchain could provide solutions for the mounting threat of data breaches.

Blockchain is enabling us to decentralize data to share data more securely, more efficiently, said Bruce Silcoff, the CEO of Shyft International, which says it is using blockchain technology to standardize the “Know Your Customer” (KYC) process. With KYC banks verify the identity and addresses of their clients with the goal of making sure those clients are not assisting criminals in money laundering.

In Shyft’s system, third-party “Trust Anchors” collect user data off the blockchain using traditional processes. Then they post their verifications on Shyft’s network, which allows them to safely discard the data they have collected. Those verifications are then associated with users’ signatures on the Shyft blockchain and recorded as immutable transactions.

“We’re focusing on [Know Your Customer/anti-money laundering] right now, but at the end of the day it’s any record that can be shared more securely more efficiently, Silcoff said.

Gal Mordechai a contributor at Sweetbridge, an open-source nonprofit, said his group is “creating an ecosystem of KYC-approved members and organizations.” Sweetbridge has developed a protocol for global supply chains and also assists businesses in funding projects through the sale of digital tokens.

The U.S. Treasury report encourages the creation of more regulatory sandboxes, a topic that sparked an in-depth conversation among panel members.

Panzarino said the U.K. has been able to make more progress with the sandbox concept, likely because it is a smaller market than the U.S. and has a more streamlined regulatory framework.

Silcoff said, “All the bigger players in this world are looking to the smaller, more agile countries as the sandbox, to see if this proof of concept actually works.”

Whether or not U.S. regulators are justified in their hesitation to fully support distributed ledger technology, there is still a need for caution in the fintech space, said Gagan Jain, senior manager, blockchain and distributed ledger technologies at Cognizant, an information technology and consulting company.

“When you are dealing with financial services infrastructure, you are actually dealing with a very critical part of the economy.he said. “The technology still has to prove itself at scale.”

Ross Snel contributed to this report.
Tasha Williams
Tasha Williams is a former financial risk analyst turned writer. She enjoys covering finance, cryptoeconomics, technology, and political economy.