Bring on the Blockchain Fu­ture

Don’t let reg­u­la­tion de­lay this global so­lu­tion to the weak­nesses of the fi­nan­cial sys­tem

Bloomberg Businessweek (Europe) - - OPENING REMARKS -

In the eight years since the crash, reg­u­la­tors have made some progress in strength­en­ing the global fi­nan­cial sys­tem, but the struc­ture is still not as ro­bust as one might wish. In prin­ci­ple, new tech­nolo­gies—in­clud­ing blockchain, the idea that un­der­lies bit­coin—could help fix some of this fragility. It’s a pos­si­bil­ity well worth pur­su­ing.

In what ways is the sys­tem still weak? Cru­cial func­tions—such as pay­ments and trad­ing—re­main con­cen­trated in large, un­der­cap­i­tal­ized banks or other cen­tral hubs; de­spite reg­u­la­tors’ ef­forts, losses at those in­sti­tu­tions could still have econ­o­my­wide reper­cus­sions. To make mat­ters worse, the author­i­ties don’t yet have a clear real-time pic­ture of what’s hap­pen­ing in fi­nan­cial mar­kets or where risk is con­cen­trated. Blockchain technology is ca­pa­ble of ad­dress­ing both is­sues.

Finance is about trust: In­sti­tu­tions evolved to en­able trans­ac­tions with strangers. Cen­tral­ized in­ter­me­di­aries of var­i­ous kinds solved that prob­lem, keep­ing track of who owns what and who owes whom. But they also cre­ate points of sys­temic vul­ner­a­bil­ity. Blockchain es­tab­lishes trust in a new way. It cre­ates a so-called dis­trib­uted ledger, which main­tains a com­plete his­tory of all par­tic­i­pants’ trans­ac­tions—ver­i­fied and recorded across a net­work of com­put­ers spread around the world. The record re­sides in so many places that it can’t be lost or tam­pered with.

Now imag­ine all trans­ac­tions—from pay­checks to deriva­tive con­tracts—re­sid­ing on a public dis­trib­uted ledger. Ev­ery­one, in­clud­ing reg­u­la­tors, would be in a much bet­ter po­si­tion to see (and to head off ) dangerous ex­po­sures. If a ma­jor bank ran into trou­ble, author­i­ties wouldn’t have to worry about the im­pact on vi­tal pay­ment or ledger sys­tems. Gov­ern­ments would be bet­ter able to let large in­sti­tu­tions fail, restor­ing mar­ket dis­ci­pline to risk-taking and al­low­ing reg­u­la­tion to be much sim­pler.

Get­ting there will take some prob­lem-solv­ing. The ques­tion is how to make it hap­pen. Big banks and ex­changes are par­tic­i­pat­ing in var­i­ous pro­jects to build pri­vate blockchain sys­tems. The spur is greater ef­fi­ciency and lower costs. This kind of closed-ar­chi­tec­ture innovation, how­ever, is un­likely to be trans­for­ma­tive in it­self. It’s aptly known as blockchain on “train­ing wheels.” Star­tups are also work­ing on public ap­pli­ca­tions, which have greater po­ten­tial—but reg­u­la­tions put them at a dis­ad­van­tage. It might be enough to suf­fo­cate, or se­ri­ously de­lay, a technology whose most promis­ing uses are global.

The U.K. Fi­nan­cial Con­duct Authority has found an ele­gant so­lu­tion: a “regulatory sand­box,” where com­pa­nies can test con­cepts with­out sub­mit­ting to the full com­pli­ance bur­den. This ap­proach needs to go in­ter­na­tional, with dif­fer­ent ju­ris­dic­tions agree­ing to al­low experiments with cross-bor­der blockchain ap­pli­ca­tions. If the U.S. took the lead in this ef­fort, oth­ers would sign up for fear of be­ing left be­hind.

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