The future of blockchain will strongly depend on regulators. But their views are quite diverse. Some are very much in favour of this new technology, while others are rather careful and focus mainly on the risks of distributed ledgers.
We have collected different opinions of leading financial regulatory in the Americas, Europe, Asia and Pacific voiced in public in the recent months. All recognizes that blockchain is an innovation worth to look it in more detail.
The Board of the International Organization of Securities Commissions (IOSCO) met in Madrid on 22 Feb 2016 to discuss and respond to the many ongoing and emerging challenges facing global securities markets. The roundtable discussion with leading market analysts on blockchain, highlighted the potential new financial technologies can have to improve global market efficiencies, and to provide emerging market jurisdictions with the infrastructure needed to further develop their capital markets.
The Committee on Payments and Market Infrastructures (CPMI) of the Bank of International Settlements (BIS) released its report on digital currencies on 23 Nov 2015. Innovations in the payments domain can have important implications for the safety and efficiency of the financial system and thus are monitored by many central banks. In this regard, Benoît Cœuré, Chairman of the CPMI, said: “Digital currencies and distributed ledgers are innovations that could have an impact on many areas, not only on payment systems and services. Even if today’s schemes do not endure in their present form, it is likely that other products, services and business models based on the same underlying technology will continue to emerge and develop. […] Most financial transactions are made via a centralised infrastructure, where a trusted entity clears and settles transactions.”
Distributed ledgers are innovative because they allow transactions in the absence of trust between the parties and without the need for intermediaries.
Shri. S. S. Mundra, Deputy Governor RBI said that the
Financial Stability Board (FSB) has already started consultations on developing better understanding of the intricacies involved.
In his speech to the 2016-17 Budget, Financial Secretary John Tsang said that the “government will encourage the industry and relevant organisations to explore the application of blockchain technology in the financial services industry, with a view to developing its potential to reduce suspicious transactions and bring down transaction costs.”
In his keynote address at the Global Technology Law Conference 2015 “A Smart Financial Centre”, Ravi Menon, Managing Director of the Monetary Authority of Singapore (MAS) stressed on 29 Jun 2015: “But the bigger impact on financial services, and the broader economy, is likely to come from the technology behind Bitcoins – namely the blockchain or, more generally, the distributed ledger system.”
Distributed ledger systems could potentially be applied in any area which involves contracts or transactions that currently rely on trusted third parties for verification.
A massive disruption is possible based on the technology using Block Chain which would make distributed ledger possible.
Juyeol Lee, Governor of the Bank of Korea mentioned in his new year speech in Seoul on 04 Jan 2016: “Meanwhile, as IT and finance become integrated, FinTech, big data and the uses of blockchain technology are becoming global trends.”
We need to carefully examine how these changes will affect our policy environment, and in particular the stability of our payment and financial systems.
In his speech on “capital markets and digital disruption”, Greg Medcraft, Chairman of the Australian Securities and Investments Commission (ASIC) said on 15 Feb 2016:
Blockchain will have profound implications for how we regulate.
He went on saying: “We will need to find the right balance between speed of execution and streamlining of business processes. As regulators and policy makers, we need to ensure what we do is about harnessing the opportunities and the broader economic benefits – not standing in the way of innovation and development. At the same time, we need to mitigate the risks these developments pose to our objectives. We also need to ensure those who benefit from the technology trust it.”
Commissioner Kara M. Stein of the U.S. Securities and Exchange Commission (SEC) told the audience at Harvard Law School on 09 Nov 2015: “However, creative uses of blockchain are still in their infancy, and a lot of questions will need to be answered, including on issues related to cybersecurity. I do think regulators, academics, and market participants in the U.S. need to be constantly evaluating potentially disruptive ideas like blockchain. Can it be used to enhance the quality of our markets and investor protection? Or, is there a way it could be used to monopolize markets or undermine competition? How should this technology be best deployed? Should it be run via a public-private partnership, somewhat like the Internet?”
If the market begins to move toward blockchain technology, regulators need to be in a position to lead, harnessing its benefits and responding quickly to potential weaknesses.
What specific areas could there be applications that might bring benefits or improvements? What are the specific advantages and disadvantages in those areas? What are the limitations, and the unknowns?
At the same event, his fellow commissioner J. Christopher Giancarlo said that “distributed ledgers will have enormous implications for financial markets in payments, banking, securities settlement, title recording, cyber security and the process of collateral management. Open ledgers may also make possible new “smart” securities and derivatives that will revolutionize operational and transactional efficiency. They may help reduce some of the enormous cost of the increased financial system infrastructure required by new laws and regulations, including Dodd-Frank. Enormous resources are being invested in developing the distributed open ledger known as the blockchain.”
Regulators must cultivate and embrace new technology such as the blockchain and not stifle innovation.
The European Central Bank (ECB) wrote in its RTGS services ̶ consultative report on the Eurosystem’s vision for the future of Europe’s financial market infrastructure: “The emergence of new technologies such as blockchain or distributed ledger technologies is currently giving rise to many talks, studies and publications and a number of actors in the industry are already evaluating the impact that such innovations may have on the provision of financial services. As part of its vision, the Eurosystem intends to assess their relevance for the different services it provides to the banking communities (payments, securities settlement as well as collateral).”
This investigation will identify opportunities that these new technologies may provide, as well as the challenges that they create.
In her speech at the London Business School on “Financial Innovation: towards a balanced regulatory response”, Verena Ross, Executive Director of the European Securities and Markets Authority (ESMA) said on 07 Mar 2016: “We have found that clearing and settlement, collateral management, record of ownership and securities servicing are the areas where the technology is most likely to bring useful changes. It does so through the provision of a unique reference database, instantaneous reconciliation cross all participants, immutable shared records and transparent real-time data. At the same time, ESMA sees a number of possible limitations to the technology.”
In particular, we question the ability of the DLT to handle large volumes, to manage privacy issues and to ensure a high level of security.
Christopher Woolard, Director of Strategy and Competition at the UK Financial Conduct Authority (FCA), said on 23 Feb 2016: “The current development of distributed ledger technology has the potential to revolutionise financial services; whether it is the panacea of all ills in the financial world is yet to be seen. However, it is clear that there are a lot of regulatory and consumer issues that will need to be discussed as the technology evolves. For example, how individuals gain access to a distributed network and who controls this process, along with what data security exists for users are vital considerations for us as a regulator. Innovation can be an iterative process and the development of a digital solution is therefore unlikely to be perfect first time round.”
During the phase of any digital development, it’s crucial that innovators are allowed the space to develop their solutions.
“The FCA continues to monitor the development of this technology but is yet to take a stance until its application is clearer. In the meantime, we continue to work with firms developing distributing ledger technology solutions via the Innovation Hub to ensure consumer protections are being factored in during the development phase of this technology and the Hub liaises with the rest of the organisation to ensure a coordinated and informed approach. We are particularly interested in exploring whether block chain technology can help firms meet know your customer or anti-money laundering requirements more efficiently and effectively.”
Ben Broadbent, Deputy Governor of the Bank of England, said in his speech “central banks and digital currencies” on 02 Mar 2016: “The distributed ledger works by encouraging users to verify for themselves, and others, blocks of transactions made over time. As everyone in the system has the right to do this, and everyone can see the results, there is no need for a trusted, centralised clearer. In principle, this technology could be applied to many things, not just the exchange and registering of financial assets.”
He went on saying that “A recent official report in the UK suggested that distributed ledgers might eventually be used for a wide variety of government services, including the collection of taxes, the delivery of benefits – potentially including new smart transfers that could target particular groups – the keeping of business registers and other things besides. […] However, it’s the application to the settlement of financial assets – above all financial securities like equities and bonds – in which the private sector has become most interested. […] What a distributed ledger would seek to replace, in the case of securities exchange, isn’t just a single “third-party centralised clearer”, but a complicated system with lots of institutional layers: custodians who look after the securities and perform basic services such as collecting dividends; brokers, through whom trade orders are placed; exchanges and clearing houses where exchange and settlement occur.”
The hope is that, by displacing these various middlemen, a distributed ledger would result in a cheaper and more secure system for providing these services.
In her article “distributed Ledger: The technology behind virtual currencies: the example of Blockchain”, Luisa Geiling from German BaFin wrote on 01 Mar 2016 in a rather sceptical way:
Keeping an eye on the possible risks right from the start is more important than ever.
Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, in his speech “Totally digital? The future of banking business” at the 2015 Bavarian Financial Summit, 26 Oct 2015 was much more positive: “Blockchain technology is credited with having a particularly sobering impact on banks. By using the global computer network, this technology is enabling all transactions conducted in the world of finance to be documented in a presumably forgery-proof, near-real-time and, above all, decentralised manner, ie potentially without central securities depositories or banks. Any individual and any company could therefore settle money, securities or any other type of asset and liability directly with other financial market agents – thus obviating the need for the existing, unwieldy settlement infrastructure used by banks, CSDs and central banks.” However, he also stated carefully: “As a solution for the entire financial system, this technology is thus raising fundamental questions – including regulatory questions.”
President of the Deutsche Bundesbank and Chairman of the Board of Directors of the Bank for International Settlements Dr Jens Weidmann on 24 Feb 2016 in a very optimistic way:
Blockchain technology is seen as the key innovation in this regard, allowing as it does values to be transferred cheaply and comparatively anonymously, while bypassing centralised authorities such as banks, card companies and clearing houses.