We're just back from our second visit to the Davos 'fringe' with Innovate Finance and several FinTech momentum players. Numerous events and discussions on a wide range of topics take...20 January 2017
The potential for blockchain or distributed ledger technology continues to expand beyond its virtual currency origins with a wide range of use cases being explored across the financial institutions sector and beyond. Regulatory compliance will be critical to the value of the solutions being developed for regulated activities so this assessment needs to be factored in at an early stage. The European Central Bank has published an Occasional White Paper on the use of the technology in securities post-trading.
As the rumours of the transformational impact of blockchain abound, operational examples are emerging. In essence, the technology can be used to create a decentralized, shared database on which entries are, once validated by the network according to the agreed protocols, automatically updated on all ledgers in the network. The network can be public, ie open to all, or permissioned where only authenticated members hold copies of the distributed ledger.
Key to the development of use cases in the financial services sector which will deliver practical benefit is ensuring that the solution is compliant with the regulatory structures in which it will operate – or at least being able to demonstrate that it delivers the regulatory objectives. Regulators around the world are gathering their thoughts on how to respond to the evolving technology but there is general willingness to be supportive recognising that it may offer benefits both in terms of increasing operational efficiency and in enhancing transparency for regulators.
In April, the European Central Bank published an Occasional White Paper on the use cases for distributed ledger technology in securities post-trading. The paper explored the implications for the technology in a range of those scenarios, concluding that it and smart contracts offer opportunities and that "innovation is, in general, welcome in the European post-trade market for securities, wherever it can bring safety and efficiency". However, it also acknowledged that potential barriers currently exist, principally from the lack of maturity of the technology and the need for critical legal, operational and governance issues to be clarified. It cautions that a lack of harmonisation and standardisation could inhibit its potential and that common standards and business rules may be required in order to realise the full benefit.
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