Blockchain is one of the buzz words of 2016. By the financial industry, blockchain is seen as the future. Its impact is compared to how internet has revolutionized the computer and global communications, like nothing before. Especially, financial parties seem to be investing in blockchain and the potential advantages this technology may offer to them. Undoubtedly many know what blockchain is all about. But probably even more don’t. This article is aimed at the latter. In order to help understand what this “buzz” is all about, blockchain is demystified in four consecutive parts:

Part 1. What is blockchain? 

Part 2. Transparency, Security and Governance.

Part 3. Thoughts around the regulatory environment on blockchain.

Part 4. Impact of blockchain on the financial sector.

Extra. Impact on Corporate Treasury

Part 3.

Blockchain itself is not regulated.

Just a couple of early observations to help set the scene. Blockchain itself is not regulated in the financial services construct. Clearly the financial services industry is very well regulated. For carrying out financial services (i.e. regulated activities), you’ll need to be a regulated entity. Whilst – as stated – blockchain itself is not regulated, if you are using blockchain for some form of regulated activity, that could easily bring you within the regulatory scope.

Opportunities to the financial sector.

One of the key opportunities blockchain brings to the financial sector, is removing the single point of failure from the financial system. Currently a number of intermediaries perform different functions and reconcile work books and records between each other. But if one of those players in the system fails, there could be real issues in terms of reconciliation and continuity.

But is blockchain truly scalable to the extent it can replace an effective financial system? Is it secure, particularly in terms of protecting privacy and data? Is it resilient enough? Is there interoperability (are interfaces completely understood, does it works with other products or systems, present or future, in either implementation or access, without any restrictions)?

So if you think about it, it’s unlikely that there’s going to be a single blockchain ledger that emerges. It’s likely there will be hundreds if not thousands of competing ledgers emerging in the future. But how will these be regulated?

Regulatory concerns.

Underlying these innovations, there are 4 key regulatory concerns. First of all, is consumer protection ensured? Second, does the blockchain system create a regulatory lacuna, where the regulator can’t actually regulate all participants? Because blockchain operates on a distributed basis, it’s possible that a certain regulator may not be able to regulate all parties involved. Third, what is the resilience of any new technology and can it lead to consumer detriments? Fourth, could blockchain lead to financial crime and terrorist financing? If there was a regulatory gap, or a lack of systems and controls built within the system, that could mean that all sorts of nefarious activities are allowed or actually even encouraged.

But to the question whether blockchain itself can effectively be regulated, the answer is yes and no. Clearly you can regulate by imposing regulatory obligations on proprietor (financial institution). But it’s a little bit more difficult with a system like for example Bitcoin, where you may not have someone who you can easily identify as the proprietor. If you can’t identify the persons who are actually controlling the system, how can any enforcement action by a regulator be brought?

However if a system is run by an entity that is already in the regulatory sphere, then it will come within their scope of regulation. But for something like Bitcoin – which is outside of the regulatory scope  – regulators focus on those that interact with the system (along the lines of payment service providers). It does raise the question as to whether we need new legislation to facilitate blockchain and innovation in this sector in general. Though there is an overall reluctance to regulate specific forms of technology because it may turn out too difficult for regulators and regulation to catch up and keep up.

Coming up in the last post:

Part 4. Impact of blockchain on the financial sector.

Extra. Impact on Corporate Treasury


About the author

Norbert Braspenning – Managing Director Asia-Pacific – of ING Bank N.V. (wholly owned subsidiary Bank Mendes Gans N.V.). Norbert Braspenning is responsible for establishing and building market share Asia. As a vital resource to his prospective clients, he provides a vast knowledge of accounting, system, operational, legal and tax issues related to ING’s liquidity management solutions. Braspenning is a lead liquidity management solution expert with proven abilities to succeed collaboratively within a multi-cultural, complex organizational environment. In this post Norbert Braspenning expresses his personal insights, expert views and opinions with respect to the topic(s) discussed.