Digital Identity, Cryptocurrency & the LEI

The future of global monetary policy, Crypto and how the LEI system can play a major role 

​The way we conduct business on a global scale is becoming ever more digitised. This intensifies the need for more robust and standardised security around digital identity and transparency when it comes to financial transactions and sending money abroad.
 
This includes the need for regulators to custody their respective markets and ensure fairplay, and also provide the participants in each market to have sufficient, reliable and standardised data on who they are doing business with.

​With the ongoing complications brought on by the ​COVID-19 pandemic, we have seen how the current global financial system has room for improvement, and how the Legal Entity Identifier can help fill these gaps.

​One of the issues currently facing the GFS (Global Financial System) is the need for fast, secure and a cost effective alternative to cross border financial transactions. Cryptocurrency may be the answer to this. We know it is currently being discussed within the IMF (International Monetary Fund), and World Economic Forum with projects such as Ripple Ledger potentially offering faster, more reliable and cost effective ways to send money abroad e.g remittances. This could form a new stable bridge currency,  liquidating trillions of capital held in reserve in foreign pre-funded accounts, and provide stimulus to the wider economy, which is the exact economic boost needed in these difficult times.  
 
Also, current payments systems such as SWIFT currently face a number of similar issues.

​Current #AML #KYC and compliance requirements cause liquidity delays, beneficiaries have little information to automate reconciliation which is done manually, identity issues such as 'payment on Behalf Of' (POBO) result in time-consuming workarounds.

These delays can all be streamlined by access to reliable data such as the Legal Entity Identifier database. The LEI helps identify debtors and creditors in transactions quickly, easily and reliably.

This solution presented by the LEI can also be applied to both SWIFT transfer and a cryptocurrency alternative to SWIFT, as it is both interoperable and globally recognised.
 
Both SWIFT and Ripple Ledger have signed up to the ISO 20022, which may potentially adopt the LEI as it KYC solution. This would drastically increase the number of LEIs in existence, which currently sits around 1.77 million LEIs. The LEI can also be utilised by Central Banks to provide transparency and reconciliation of global payments within a CBDC system.

In the physical world we would never consider a SWIFT transaction to an unverified entity. We would have regulatory compliance, KYC protocols, verification processes and credential validation. Perhaps even a custody and clearing service!

But in the digital world HOW do we know:
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Who or What are you?
Who or What do you represent?
Who or What am I?

This is essential in business as organisations and investors need to verify their transactions for legal, security and regulatory purposes.

Yet Cryptocurrency, with its anonymity focus is now a MAJOR focus of Institutional investors and in order for it to be accepted more broadly as a utility, it needs regulatory clarity, and efficient KYC processes.
Cryptocurrency ‘institutional investor interest is growing at pace.’

WHY?

Cryptocurrency is forecast to grow 0.3% with a CAGR of 32% from 2019 to 2024.

Cryptocurrency has the inbuilt advantages of:

• Immutability   
• Global Distribution                
• Transaction Speed

(Similar qualities to that of the global Legal Entity Identifier system)

Cryptocurrency is a global digital currency that is secured by cryptography. It is also usually not tied to any Government or central authority meaning it has a decentralised control system. This is normally a distributed ledger technology, called a Blockchain.”

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Blockchain and the LEI

Blockchain technology is essentially a decentralized ledger that records data or transactions in an immutable and transparent manner. These records are stored in Blocks which are chained to each other using cryptography.
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There are various types of Blockchains in existence but generally they have distinct attributes which can be public or private, permissioned or permissionless.

​The cryptocurrency Bitcoin, which was the first implementation of blockchain technology, has the attributes of being public and permissionless. Meaning anyone can join the Bitcoin network, read the public ledger, and participate in validating transactions and blocks.

While the transaction records of cryptocurrencies like Bitcoin can be viewed by anyone with the address details, they do not require a real world identity to be provided. This means that the transactions can be anonymous and untraceable to the participants in the transaction.

With no transaction links to the real world and its decentralization, transparency and append-only nature, financial anonymity is possible.
 
Financial anonymity, meaning know Your Customer (KYC) and anti-money laundering (AML) is not possible...
 
No this is not a new problem, and there is an existing SOLUTION.
 
We need a verifiable Digital Identity to meet our regulatory requirements. This means Bitcoin may not be the answer, but there are other projects in the cryptosphere with the potential to provide such solutions, and paired with the LEI it would provide a powerful combination. 

Neutral bridge assets such as a blockchain based currency would enable seamless currency movement between various Central Banks without requiring each one to load pre-funded accounts often required in cross-border transactions. 

An on-Demand Liquidity service would allow financial institutions to transact in instantly on a global scale, using a digital asset as a bridge currency. 

A  will create faster, cheaper, and more efficient payment infrastructures with lower failure rates; greater competition and access to global markets; increased access to financial services for unbanked populations; and government sovereignty over monetary policy.

The Bank for International Settlements (BIS) issued a report recommending the use of LEIs to enhance KYC processes. 

The LEI solution was created after the financial crisis in 2008 when firms and regulators had difficulty tracing and establishing participants in financial transactions in organisations such as AIG and Bear Stearns.
 
A 20-digit, alpha-numeric code based on the ISO 17442 standard. The LEI is a unique legal entity reference number enabling identification of legal entities participating in financial transactions GLOBALLY. Providing a standardized framework that enables accuracy and reliability in a global financial system for all the market participants.

The use of the LEI for fully distributed verifiable credentials provides a missing capability in distributed identity. The value extends far beyond financial services to e-commerce, trade services, and governmental reporting. The LEI in this way reinforces the value the ISO 17442 standard as the world of organizational identity in the digital world evolves.”
Jim Northey, Chair, (ISO/TC 68) responsible for creating global standards for the financial services industry.

LEI usage is already providing firms with the ability to improve transparency, risk management and regulatory compliance.
According to a report by McKinsey, the wider use of Legal Entity Identifiers (LEIs) across the global banking sector could save the industry $2-4 billion USD annually.
 
In April 2019, the Global Legal Entity Identifier Foundation (GLEIF) and the Association of National Numbering Agencies (ANNA) piloted the first daily open-source relationship files that link newly issued International Securities Identification Numbers (ISINs) and Legal Entity Identifiers (LEIs).
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With a universally recognized digital identifier, this would further help cater to the demands of exchanges, regulators, service providers, and custodians. The ISIN to LEI would facilitate clearing and settlement of securities and payment processing during the issue of a specific security.

The linking of ISINs and LEIs was endorsed by regulators, including the Financial Stability Board (FSB) and the European Securities and Markets Authority (ESMA). NNA's such as Tokyo Stock Exchange ,London Stock Exchange, CUSIP Global Services continue to join the ISIN to LEI Mapping Initiative. The daily ISIN-to-LEI relationship files, are publicly available on the GLEIF website, and include new ISINs issued by national numbering agencies (NNAs).
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Volumes of ISIN-to-LEI coverage have grown to over 5.2m active ISINs linked to almost 72,000 unique LEIs.

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Could all this mean that a cryptocurrency based financial system becomes the de facto money transfer system replacing SWIFT? It certainly is a conversation being had within the major financial authorities around the world at the moment.

A digital LEI system would provide the following benefits to such a system:

✅ Universal access to a live database with up to date data on all market participants
✅ A globally standardised identifier for all entities
✅ KYC and AML efficiency
✅ Futureproofing for additional tokenisation of digital assets
✅ Instant reconcilation of received funds

✅ Regulatory compliance and traceability
✅ Reductions in operational costs
✅ Increased customer satisfaction
✅Global marketplace access

LEI Worldwide could play a major role in this transition by providing and managing Legal Entity Identifiers to the market participants engaging in these transactions.
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LEI Worldwide is seeking partnerships with Globally Important Financial Institutions such as banks to help them become Validation Agents as a part of GLEIFs new VA programme, offering management to their LEI portfolios and ensuring timely renewals, a streamlined registration process through the use of APIs and access to a fit for purpose LEI management system.