Regulation: The benefits of blockchain

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Banks are suddenly obsessed with potential of the distributed ledger in financial markets, but regulators must make sure it is used in ways that remove collusion and wrongdoing.

From the IMF/World Bank meetings in Lima to the Sibos conference in Singapore and at every banking industry meeting in between, one surprise topic has emerged at the very top of the agenda across financial services. It is not the slowdown in China, the worrying outlook for global growth, or the signs of mal-investment fuelled by quantitative easing from developed world central banks now unfolding in an emerging market financial meltdown that has bankers enthralled.

Rather it is the potential of the blockchain technology underpinning the cryptocurrency bitcoin to transform the global payments and financial market infrastructure – and to disrupt the centuries-old role as central intermediaries and repositories of trust within the financial system of the banks themselves.

Euromoney reports in detail this month on how banks are grappling with the potentially transformative application of this technology.

It comes to something when leading central bankers discuss this technology almost matter-of-factly in terms of its potential role in issuing currency and conducting monetary policy. In a speech in September, Andy Haldane, chief economist of the Bank of England, raised the blockchain and digital currency’s potential role in enabling negative interest rates.

Haldane argues it is now clear that the distributed payment technology embodied in bitcoin has important potential. It solves a deep problem in monetary economics: how to establish trust – the essence of money – in a distributed network. Bitcoin’s blockchain technology offers an imaginative solution to that distributed trust problem.

Whether a variant of it could support central bank-issued digital currency is clearly an open question that the Bank of England and the Fed, among others, are now considering.

It would be quite a victory for the core technology underlying bitcoin, considering the world-view of its founders was to create a censorship-resistant currency beyond the control of any government.

Regulators see the value of a shared, open and incorruptible ledger of record in many markets. But here is one issue the regulators should look out for.

There is a certain irony that banks are now seeking to separate the underlying shared or distributed ledger technology from bitcoin because of the currency’s damaged reputation through its association with the dark web. Instead of a public, open, fully transparent blockchain, they want instead to move markets onto semi-private permissioned blockchains verified by regulated and trusted sources such as – you guessed it – the banks themselves.

These, let us remember, are the same banks that have been repeatedly fined for colluding to fix markets from foreign exchange to Libor, high frequency equity trading, commodities and just about everything in between.

It remains to be seen whether use of the shared ledger will remain largely an internal process within banks, deployed so that their own systems can inter-operate with each other. This is a big problem for banks and part of the hype around the blockchain stems from vendors, abundantly funded by venture capitalists, pushing on an open door to sell their new product as a solution to all the woes of banks whose creaking IT infrastructure is close to collapse.

If the blockchain becomes the wider underlying trading and payments fabric for capital markets – and this could start within months – it would be wise for regulators to seek to ensure that its use ends some of the rampant wrongdoing that has been allowed to prevail under their watch.

It would be the worst irony of all, if regulators’ own insistence on compliance with know your customer and anti-money laundering allowed banks to dodge the light potentially shone on their activities through a public, unpermissioned blockchain.

Getting to grips with the blockchain













Banks have suddenly cottoned on to the power of the blockchain technology beneath Bitcoin. Inside their own treasuries and innovation labs, and increasingly in collaboration, banks are testing uses for rebranded distributed ledgers to replace their costly, proprietary systems. 

Enthusiasts see banks creating a new fabric for payments transfer and financial markets, an internet of money. 

Doubters sense it’s all hype. 

Big challenges remain, but markets from private equity and syndicated loans to corporate bonds and derivatives may go on private blockchains within months.

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