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Trust and Technology: Pre-requisites for Success in Digital Regulation

Part IV: How the LEI can be leveraged to enable straight through processing, to strengthen the fight against financial crime and to prepare for a global digital identity ecosystem


Author: Stephan Wolf

  • Date: 2018-12-18
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One of the biggest challenges confronting the world’s financial ecosystem is how to complete its transformation to a fully digital environment. Success here will be determined, in part, by the new digital system’s ability to identify participants in financial markets and track, predict and mitigate fraud.

As with any system of trust, the digital financial ecosystem requires a supervisory, regulating function that can monitor its operation and collect data that will enable positive adjustments to be made. To be effective, this means it must evolve its operational and supervisory functions as harmonized aspects of a single, unified whole. Put another way, the regulatory function must use technologies that work in concert with those that underpin the rest of the system.

In this post, the last in our blog series exploring financial trust in the digital age, we assess possible means to achieve this parity. Among other things, it requires focused and immediate attention; the ecosystem’s current regulatory capabilities risk falling short of this ideal. Unless the gap can be narrowed, the digital environment will evolve to allow fraudsters to continue to expand their exploits, undetected, and possibly extend their advantage.

Central to the development of a robust digital regulatory function is the ability to consistently identify transacting parties in real time and on a global scale. This requires all stakeholders to conform to a single, shared means of digital identity verification.

Digital technology: Friend not foe

In our interconnected world, information overload risks eroding trust, so stakeholders must work harder than ever to mitigate doubt when verifying each other’s identity. As regards creating trust and transparency across global financial markets, some market observers have suggested that rules, regulations and supervisory institutions cause more problems than they solve and that ‘technology will soon make them redundant’. At the same time, these critical voices also frequently fear that financial regulation may hinder innovation; a show stopper for the digital economy: “The main drag on implementing innovation in financial services is regulation.” (CoinDesk).

In our view, regulation, however, is the representation of shared ethical norms that underpin trust: “Trust is the expectation that arises within a community of regular, honest, and collaborative behavior, based on commonly shared norms, on the part of other members of that community… Communities depend on mutual trust and the shared ethical norms that underlie it. Trust is not reducible to information.” (Trust, the social virtues and the creation of prosperity, Francis Fukuyama).

Technology itself does not define ethical norms, however. It is purely the means through which shared norms can be expressed and enforced. In this way technology can’t make rules, regulations and institutions redundant, it can only facilitate or hinder them.

From this perspective then, the process of establishing a stakeholder’s legal identity digitally, is a foundational requirement, as it enables the determination of ‘who’s who’ in a digital community. The ‘shared ethical norms’ determine the acceptable behaviors within that community. So, the identity of a person or a legal entity enables rights and duties to be assigned by the community, in line with their shared values.

The proposed target model

GLEIF proposes that the target model needed to capture and articulate the spirit of digitally-enabled financial regulation must have at its core strong legal entity identification. Specifically, the financial ecosystem should enable that all endpoints are identified and verified at the point of transaction, and privacy and security benefit the entire community.

GLEIF believes that the target model should bring together two distinct concepts. The first, self-sovereign identity for natural persons, refers to the identity owner having ownership of their personal data together with control over how, when, and to whom that data is revealed. The second, connecting that individual to a legal entity by identifying the relationship or role the individual plays (e.g. Director of the Board, CEO, etc).

In this model, a legal authority is necessary to assign a legal digital identity either to a person or another legal entity, such as a company. The fact that the identity can be variously assigned in this way provides a more transparent and precise means of verifying those sitting on either side of a transaction. The legal digital identity itself consists of a set of verifiable characteristics (or verifiable claims); a [Legal Name] or [Legal Address] would be a verifiable claim, for example.

The identity owner can control the characteristics exposed when enrolling into a digital service, such as when opening a bank account for a legal entity, and a digital service provider can mandate the type of characteristics that are required for service access to be granted.

The chance for operational and regulatory parity

It has to be ensured that the regulatory processes that supervise financial transactions evolve in line with the operational capabilities of the digitized ecosystem. If technology enables transactions to pull ahead of the ecosystem’s ability to monitor and enforce compliance, it would increase opportunities for fraudsters to cheat the system, combined with significant increases in both compliance cost and process inefficiency.

Manual and database searches and paper based documentation have both had their day. Global adoption and implementation of the LEI is the solution that will enable the implementation of technologies for supervisory and operational parity. It is elegantly simple to deploy, globally interoperable and provides benefits to a wide variety of stakeholders, from regulators to businesses. With the target model informing the creation of new supervisory regulations like, for example, the European Union’s General Data Protection Regulation (GDPR), and second iteration of the Payment Services Directive (PSD2), the stage is now set for the LEI to flourish. The sooner this breakthrough technology establishes universal adoption, the better. Only then can we harness the true power of digital transformation and lift the global fight against financial crime to its rightful position of strength.

The Financial Stability Board (FSB), the founder of GLEIF, outlined a possible way forward in a recent letter addressed to the leaders of the Group of 20 (G20) ahead of the group’s summit in Buenos Aires: “The FSB is working to ensure that the G20 can harness the benefits of new financial technologies, while containing associated risks to financial stability … More generally, the FSB and standard-setting bodies are exploring how a broad range of innovations—including distributed ledger technology, the global LEI, artificial intelligence and various payments technologies—could promote financial stability while bringing wider benefits to consumers and businesses.”

GLEIF fully supports these objectives.

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About the author:

Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation (GLEIF). Since January 2017, Mr. Wolf is Co-convener of the International Organization for Standardization Technical Committee 68 FinTech Technical Advisory Group (ISO TC 68 FinTech TAG). In January 2017, Mr. Wolf was named one of the Top 100 Leaders in Identity by One World Identity. He has extensive experience in establishing data operations and global implementation strategy. He has led the advancement of key business and product development strategies throughout his career. Mr. Wolf co-founded IS Innovative Software GmbH in 1989 and served first as its managing director. He was later named spokesman of the executive board of its successor IS.Teledata AG. This company ultimately became part of Interactive Data Corporation where Mr. Wolf held the role of CTO.


Tags for this article:
Client Relationship Management, Compliance, Data Management, Digital Identity, Know-Your-Customer (KYC), Open Data, Risk Management, Regulation, Standards