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Regulators Are Catching Up to Cryptocurrency and Blockchain Technology within the Financial Services Industry
As we head into 2018, cryptocurrency and blockchain will continue to be a top initiative for pioneers in the financial services industry. Within financial services, this space includes everyone from those looking to issue a new cryptocurrency, FinTech firms looking to disrupt the financial services industry though creative uses and implementation of the technology, and banks and non-bank lenders of all sizes looking to see how they can best utilize the technology to cut costs and drive advancements in service. As with any innovation within the financial services industry, the regulators are never far behind and are doing their best to keep up. Those that enter this space will find that they also have to pioneer the controls to manage the regulatory risks this technology presents.
For the benefit of the uninitiated, cryptocurrencies, also known as “virtual currency,” such as the well-known “BitCoin” and “Ethereum,” are the results of just one application of blockchain technology. One should not visualize cryptocurrencies as actual currency or legal tender (we discuss why below). Instead, think of cryptocurrency as a means of utilizing the underlying blockchain technology to create a “store of value.” Anything that can function as a vehicle to save, house, move and maintain value and/or wealth can be utilized as a “store of value.” For example, gold, silver, real estate, diamonds, fine art and stocks are all “stores of value.” Viewing cryptocurrency in this manner will enable you to understand its regulation within the financial services industry.
As previously stated, blockchain is the technology upon which cryptocurrencies are built. At a high level, blockchain technology is simply a decentralized or distributed ledger, meaning that there is no master copy of a ledger maintained by an individual or a single organization (although some banks are beginning to keep a “master copy” or “golden copy” as a means to control risk). The potential applications for this technology within the financial services industry are enormous. For example, recently a group of Japanese financial institutions came together and announced their successful testing of blockchain technology in Over the Counter (OTC) derivative contracts such as the ISDA Master Agreement. Others are exploring how to use the technology as a means to complete debt offerings, settle and maintain a record of credit default swaps, revolutionize mortgage lending, title insurance, simplify and manage correspondent banking relationships and the implementation of smart contracts to speed clearing and reduced counterparty costs.
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