Blog Article

Driving Inclusion Through Compliance


Caroline Young

Publishing date



How SDF & FinClusive Partner to Create Access to the Global Financial System

As a global interoperable blockchain, the Stellar network is built to further financial access and inclusion. Stellar does so by making money more fluid and markets more open by enabling individuals and anchors to transfer value quickly and smoothly. When financial infrastructure is connected, people have greater access to different financial services and are more likely to embrace the digitization of value.

However, businesses must ensure they protect their clients’ sensitive personal and financial information. Whenever a customer entrusts a business to store, transfer, or issue value on their behalf, whether that value is fiat or digital, the business takes on the obligation to guard against fraud, money laundering, and terrorist financing. In traditional settings, these compliance obligations have too often led financial institutions to adopt the practice of de-risking, ceasing or denying services altogether; the resulting exclusion has hurt many and disproportionately impacts individuals and organizations who need financial services the most.

FinClusive provides a way for anchors to achieve compliance while prioritizing financial inclusion. By offering a comprehensive compliance toolkit, serving as an on-off ramp anchor, and connecting organizations to the US bank sector, FinClusive makes it easier for new anchors on Stellar to establish firm roots in the financial markets and ensure they maintain the essential protections to keep their clients and the financial system safe from abuse by illicit actors.

FinClusive CEO Amit Sharma joined SDF’s General Counsel in a webinar on Sep. 9, 2020. Together, they explored how Stellar can be used in a compliant manner, and how FinClusive empowers organizations to facilitate the flow of money through a comprehensive compliance layer and accessible digital payments rails.

How FinClusive Landed on Stellar

FinClusive was attracted to building on Stellar for two reasons: 1) the network’s commitment to inclusion and 2) the ability and ease of creating tools for multiple use cases for any kind of organization and anchor. Traditional regulation and compliance are notoriously laggard, but Stellar makes it possible for organizations to fulfill their compliance obligations in a way that is modernized, efficient, secure, and transparent.

The US market provided the perfect setting to test out new compliance solutions. Post 9/11, the US government overhauled its anti-money laundering framework (driven by the Bank Secrecy Act (BSA)), increasing regulatory requirements for traditional financial institutions and expanding the application of these rules to the growing non-bank financial sector. The USA PATRIOT ACT (Patriot Act) broadened the breadth and depth of the BSA and the rules both bank and non-bank financial institutions have to follow to stay AML-compliant.

This strictness eventually led many to de-risk, with traditional financial institutions denying services to many organizations based on their geographical location or the nature of their business, rather than the actual risk that they posed. The need to address actual, rather than perceived risk while interconnecting multiple jurisdictions and global organizations through a safe, compliant channel drives FinClusive to work and grow on the Stellar ecosystem.

Inclusion Where There’s Exclusion

Financial institutions, money service businesses, and payment facilitators are responsible for performing more due diligence than ever. This compliance burden results in financial institutions adopting a mindset of de-risking and exclusion, which has led to:

  • Not providing financial access to low-moderate income brackets, emerging markets, non-profits, money-service businesses, or remitters because of their perceived risk.
  • Not streamlining their compliance process. Compliance is often piecemeal, and compliance solutions are often not interoperable. An organization’s compliance stack can consist of 7-15 different point solutions and processes just to cover all the bases, making compliance inefficient and expensive.

FinClusive understands these pain points, leading them to question what the base risk is and how to streamline the process for organizations large and small – especially as a new breed of financial intermediaries continue to emerge and provide services outside traditional banking. The growth of fintech companies and those engaged in crypto and virtual assets are equally feeling the pressures of growing regulatory obligations, but also represent tremendous opportunities to facilitate inclusion in an already financially borderless world. The compliance tools FinClusive has built are able to integrate with multiple third-party capabilities in a cost-effective and multilateral manner resulting in a robust full-stack approach to compliance – consumable by both traditional and modern financial services companies.

Given the global nature of financial intermediation and the growth in the virtual asset/crypto economy, FinClusive is leading a sector-led task force that has created a robust and comprehensive financial crimes compliance framework for this sector. With the important support of Stellar and several of its anchors, and the participation of the regulatory community, this Rulebook is intended to drive self-incentivized governance to keep safe and secure financial access open to those who need it.

What does this mean? Say, if five different anchors were originating clients, they can access client information without repeating the KYC verification-validation process with multiple parties. Instead, if all five anchors are using FinClusive’s Compliance as a Service, or CaaS, they can do a near-instant verification validation of these clients across the network as a shared utility. The time normally spent on compliance is now time that can be spent on transferring value quickly with the essential client and transaction monitoring controls in place.

Use Case: Biccos

FinClusive’s partnership with Biccos provides a good example. With Biccos, an anchor in Mexico, FinClusive is working to enable money-service businesses to facilitate quicker cross-border remittances. Cross-border remittances between US and Mexico have been considered high risk by regulators because of previous and ongoing exploitation by illicit actors, which negatively cast a poor light on otherwise legitimate individuals, such as day laborers constantly converting hard-earned US dollars into Mexican pesos. The high inventory of cash assets in money exchanges presents a security challenge, and workers are unable to use that cash to pay bills or send money to family and friends in their local currency.

With FinClusive, money-service businesses and their clients can set up insured accounts in the US. Finclusive’s KYC processes do not automatically exclude individuals based on their employment as a laborer or because this type of activity is categorically (mis)understood as high compliance risk. Once KYC’d, workers can deposit their hard earned US dollars into an insured account. FinClusive will then convert those dollars into digital assets that can transfer across Stellar rails to its partner, Biccos. These assets can safely and quickly land in Mexico, on behalf of the client and in the form of pesos. Clients can now access that money through mobile applications, using it to pay their expenses or convert it and withdraw it into fiat pesos.

Throughout this entire process, FinClusive establishes a compliance overlay from an onboarding and monitoring perspective. Each party has been initially validated via FinClusive’s KYB or KYC and monitored, while ensuring protection of clients’ personal identifying information. Transactions and flow of funds are tracked, allowing for an audit trail of the transaction and the use of funds from an AML perspective. In addition to meeting their compliance needs, anchors using FinClusive in this way can also meet their obligations under the Travel Rule. After being KYC’d by FinClusive, both the sending and receiving parties are given a unique FinClusive ID and are associated with all of the transactions in which they are a part. Transaction information as well as the personal identification information underlying the FinClusive ID can be made available to regulators and law enforcement if requested through appropriate legal processes.

The friction of managing security while handling large amounts of cash inventory (dollars or pesos) is removed thanks to the digitization of these assets. The Stellar rails provide a viable and scalable pathway outside traditional banking to send money, when such avenues may no longer be available. Costs go down, efficiencies go up, and regulators are able to look at this ecosystem and see the process remains compliant at each step. Most importantly, day laborers and other clients including cross-border businesses who traditionally have a hard time getting formal banking services can now securely access and use their money for important, day-to-day needs.

Ready to explore Stellar as a solution for your business?