Blockchain can shake up financial services, affect financial stability, Fed paper says

Federal Reserve

By Neil Roland. 1 September 2017.

Blockchain and other distributed ledger technologies have the potential to shake financial services to their roots and set off a series of other innovations that could affect financial stability, a US Federal Reserve paper said.

Distributed ledger technology, or DLT, is a kind of "foundational" or "infrastructure" innovation that "occurs extremely rarely," the working paper by Fed PhD economist John Schindler said.

The paper, posted last month, added, "If you have a genuinely new product, further innovation can more easily be built on top of it." For example, smart contracts, or computer protocols that can automate execution of contract provisions, could be written into distributed ledgers if the technology becomes widespread, the Fed researcher said.

This would automate "a significant portion of the financial system," the paper said. It also would open up other innovation possibilities including "decentralized autonomous organizations" run by rules written into smart contracts.

DLT-based firms

DLT, a secure way of storing data about payment, clearing and settlement transactions in a decentralized way, underlies bitcoin. Other securities markets and companies are developing products and services on a distributed ledger foundation.

Nasdaq has been an early experimenter with blockchain for private securities that don't trade on an exchange but can generate a lot of paperwork.

Overstock.com has established a blockchain-powered stock exchange called tO, which traded the first US Securities and Exchange Commission-regulated crypto securities in December 2016. The company also has issued bonds on the bitcoin blockchain.

Some US regulators already have noted blockchain's potential.

Christopher Giancarlo, head of the Commodity Futures Trading Commission, has said the technology "offers a great deal of promise" as a way to create a global network of derivatives trading repositories.

But the European Securities and Markets Authority has warned of potential systemic risks posed by DLT and called for "close monitoring." The regulator said the technology could increase market volatility, interconnectedness and liquidity.