Whether you know it or not your business is a compliance service.

Paper in Brief:

• Compliance is part of almost all businesses.?
• It can take the form of validating data, authenticating identity, regulatory compliances which are dependent on the type of service the business is delivering, and many other types of non-regulated but absolutely required compliance which must be auditable in order to affirm that the business is being operated to both reduce risk and manage regulatory requirements-? (e.g. liability and fines)
• The compliance aspect of many businesses does not tend to be a core competency. This means that the business operates the requirements for compliance but the cost to provide the compliance may be higher than necessary on a per transaction basis. This also means that the business may not be architected both physically and technically to manage changes to compliance requirements and audits. This also ends up generating more cost than necessary.
• Compliance is usually seen as a frustrating overhead but can be a real advantage for a business. Appropriately architected compliance does not throttle the pace of transactions and can reduce the cost of providing transactions versus competitors. Compliance functions that throttle transactions and bottleneck deal flow can threaten the business’s existence.?
• If the compliance service along with the rest of the service provision infrastructure is architected strategically then the compliance service itself becomes an asset and something from which the business can earn additional revenue (e.g. - by providing the compliance service as a SaaS to third parties)
• Businesses which manage compliance well tend to grow faster and have better valuations because risk is traceable and auditable
• If you intend to build a “bank” and the compliance function is not considered as part of the actual service then the bank will struggle to build sustainable value.?
• The inability to manage compliance has led to many notable issues for banks, insurers and other institutions where managing certain types of compliance was either not considered or continually improved.?
• CaaS or Comply-Tech is? growing segment of enterprise SaaS?

Mostly when we think of compliance we think of regulatory compliance but in the case of this paper I am referring to all transactions which require verification. I would even consider the way API’s are architected to represent compliance to a standard that makes the business easily interact within its chosen ecosystem. ? Some may require third party audits and some may not but in order to reduce errors and keep transaction processing costs low a compliance function needs to work.?

If you are a startup and the narrative of your business does not include how you will manage, update, and make your compliance auditable then this is something investors need to consider before investing. If you have a unique model and require a homegrown compliance function then the strategy and execution of this function is all important.? In most cases, however, there will be a SaaS compliance service which will be applicable for at least part of the required compliance and the requirement to manage the compliance function will rest on the SaaS provider so your business can focus on its primary revenue model. I am sure there will continue to be innovative crypto models which will require different forms of compliance not yet automated.?

If you are an existing business and struggle to manage both regulatory and other forms of compliance required to successfully operate your business then you leave the business vulnerable to risk. In the past few years, many banks and insurance companies have struggled specifically with compliance. Much of this stems from the depth of legacy architecture and an inability to update and manage compliance. Technology debt and organizational structure block these businesses from transforming the way they operate and provide customer services even though they spend as much as the tech companies do. The opportunity for startups is to architect the business so compliance functions are loosely coupled, easily updated, cost effective to operate and maintain and easily facilitate audits.?

If I were operating a FinTech business, neobank, DeFi or any type of financial service, I would look closely at how compliance is handled and I would invest in turning it into a business advantage as opposed to a frustrating overhead and a bottleneck to deal flow. There are many financial services businesses which are at this moment scrambling to alert customers to errors which require them to fund accounting activities and pay interest on top of funds which should have been paid over several years ago.??

Next generation decentralized finance businesses are designed for compliance because the auditability is transparent to all users.? The blockchain is independently verifiable which ensures the integrity of a distributed ledger application.? Software such as ChainAnalysis, TRM Labs, CoinPath and Elliptic (among many others) are examples ways to integrate AML and KYC compliance functions into DAO / DeFi platform and allow the SaaS providers to manage all the critical aspects of compliance for a decentralized finance platform. Although the chain of transactions prior to being converted into a crypto currency can always be obfuscated.?

The bottom line is compliance is costly to provide if not architected appropriately and retrofitting it is also costly. The strategy, execution and narrative around compliance needs to be a key component of any business and if possible this compliance should be automated in order to reduce cost, increase the flow of transactions and reduce risk. Getting on the front foot and leading the industry is the way to differentiate your business and make your business more attractive to potential acquirers.