Bloomberg Businessweek (Asia)

Bring on the Blockchain Future

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


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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