Op-ed: Blockchain
Blockchain is an important technology development that has the potential to change fundamentally the world's capital markets.
A lot of people have heard about the digital currency bitcoin, but the term blockchain might be completely new.
Blockchain is the algorithm behind bitcoin that allows it to be traded without a centralised ledger. Blockchain is a vehicle for transferring value and holding records.
In basic terms, blockchain is an electronic ledger of digital events; one that’s ‘distributed’ or shared between many different parties. There is no central authority or third party intermediary overseeing it or deciding what goes into it. The computers that store the blockchain are decentralised, and are not controlled or owned by any single entity.
Blockchain maintains a continuously growing list of data records. Each transaction or record is evidenced by a unique data set or 'block' that attaches to the continuously growing blockchain. Every block in the ledger is connected to the prior one in a digital chain algorithm. So the record of every transaction lives on the computers of anyone who has interacted with it, and is updated with each entry. The continual replication and decentralised nature makes it secure.
My view is blockchain potentially has profound implications for our markets and for how we regulate. There are four reasons why:
First – efficiency and speed. When investors now buy and sell securities they generally rely on settlement and registration that takes several days to settle and even longer with cross-border deals. Blockchain can automate this whole process.
Second – disintermediation. Blockchain automates trust and eliminates the need for 'trusted' intermediaries. In the traditional market, buyers and sellers cannot automatically trust each other, so they use intermediaries. With blockchain, the nature of the decentralised ledger creates this trust. Investors can deal with each other and issuers in private markets directly.
Third – transaction costs. By eliminating settlement and registration and other intermediaries, there is potential to cut transaction costs. A June report backed by Santander InnoVentures, the Spanish bank's fintech investment fund, estimated blockchain could save lenders up to $20 billion a year in settlement, regulatory and cross-border payment costs.
Fourth – market access. Because of blockchain's global nature, world markets have the potential to become even more accessible to investors and issuers. And therefore making it easier for these people to issue or invest in securities.
Naturally, harnessing this potential will depend on the integrity and capacity of blockchain technology and processes. It will also depend on industry's willingness to embrace new settlement and then invest in it. The potential is, nonetheless, enormous.
Right now, we don't know exactly how blockchain - or other disruptive technologies -will evolve. But it is fair to say they will and blockchain potentially has profound implications for our markets and for how we regulate.
But a note of caution - these opportunities can challenge investor trust and confidence, and the integrity of markets.
As regulators and policy makers, we want to work to harness the opportunities and the economic benefits, not stand in the way of innovation and development. But at the same time, we need to mitigate the risks digital disruption may pose.
This is an issue that cannot be managed by individual countries, but must be dealt with at the multi-lateral level. To this end IOSCO, the international group of world regulators of which I am chairman, is working to identify risks to business models from digital disruption like the blockchain. It is also working on international policy to drive innovation without undermining confidence in our markets. An example is IOSCO's work on crowd funding.
IOSCO is also developing guidance to strengthen cyber-resilience of financial market intermediaries and working to strengthen co-operation between countries.
Digital disruption, like blockchain, presents exciting possibilities for capital markets. But as a regulator, it is my job be sceptical and ensure we harness the benefits while also mitigating the risks. In other words, we need to help innovation while preserving both market integrity and the trust and confidence of investors. That is what the public expects.
Greg Medcraft is Chairman of the Australian Securities and Investments Commission.
This piece was published by The Australian on 26 October 2015.