Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Market / Stock-market-news/  Blockchain sends banking regulators back to basics
BackBack

Blockchain sends banking regulators back to basics

Regulators are now asking if blockchain process will have an impact on how they protect consumers and keep the financial system stable if something goes wrong

Using cryptographic algorithms, blockchain keeps track of and verifies transactions, adding new transactions in blocks to the chain of all previous transactions. Photo: iStockPhotoPremium
Using cryptographic algorithms, blockchain keeps track of and verifies transactions, adding new transactions in blocks to the chain of all previous transactions. Photo: iStockPhoto

London/Hong Kong: (Reuters) - The ‘fintech’ sector hoping to revolutionise finance with the adoption of blockchain, or distributed ledger technology, is forcing global financial regulators to start looking at whether they need to change the rules governing markets and banking.

Regulators are now asking whether the blockchain computing process, which underpins the digital currency bitcoin, will have an impact on how they protect consumers and keep the financial system stable if something goes wrong, the Reuters Financial Regulation Summit heard this week.

Using cryptographic algorithms including digital signatures, blockchain keeps track of and verifies transactions, adding new transactions in blocks to the chain of all previous transactions.

This electronic ledger can be shared across a network but records of the transactions already verified cannot be tampered with or revised.

The technology is now being promoted as a potentially “disruptive" force that could reduce the role of banks in making payments and change the way trades in financial instruments are cleared and settled, affecting market transactions worth trillions of dollars annually.

“How does it affect not only things we care about but built the (regulatory) regime around ?" Andrew Bailey, deputy governor of the Bank of England and Britain’s top banking regulator said.

“As regulators we need to be managing the change without killing it," he said.

International regulatory body the Financial Stability Board, has already been working on a study to determine whether innovations like blockchain pose any sort of threat to the stability of the financial system and what risks need addressing.

The findings, yet to be published, are keenly awaited by the sector as they will have a bearing on any new national rules.

Much of the concern boils down to what is genuinely new, and how financial markets might change, along with the roles of banks.

“One of the issues that will emerge is broadly how to define a bank," said Stefan Ingves, chairman of the Basel Committee of the world’s banking regulators.

“If you decide to draw a line between what you define as a bank and everybody else, what does that do to the structure of the banking sector? That is likely to be quite a hot topic for many years to come," said Ingves, who is also governor of Sweden’s central bank.

Is fintech systemic?

So far regulators have been largely hands off given the tiny sums fintech development investment represents compared with the billions of dollars invested by mainstream banking in their payments and IT systems.

Consultant EY said UK fintech investment totalled £524 million ($765 million) in 2015, compared with £1.4 billion in New York, £3.6 billion in California, £388 million in Germany, and £198 million in Australia.

But politicians in countries with major financial centres like Britain, Singapore and the United States also don’t want them falling behind in adopting new technology to secure jobs and tax revenues.

And any problems on the way could be a catalyst for regulatory change, though the US treasury stopped short of proposing new rules after irregularities surrounding $22 million in loans at peer-to-peer lender Lending Club Corp this month .

Meanwhile China, which is investing heavily in fintech has been grappling with a series of peer-to-peer lending scams that have seen investors defrauded of billions of dollars.

“The more we can help key decision-makers and regulators just simply even understand what’s being developed, it’s going to be hugely important as they can provide the appropriate measures to make sure we don’t have systemic risk issues," said Alex Scandurra, chief executive of Stone & Chalk, the Australian fintech development hub in Sydney.

“Taking China out of the picture, I’d laugh at anyone who says fintech is posing right now any material risk in any market," Scandurra said.

The widespread use of blockchain in trade finance or clearing and settling trades is typically viewed as being five to 10 years away from mainstream adoption.

But if blockchain takes off, applying existing anti-money laundering, securities trading and consumer protection rules may be all that’s needed for now, regulators said.

“We should wait and see what uses the market is contemplating and whether that sort of use would imply the emergence of new risks," said Adam Farkas, executive director of the EU’s European Banking Authority.

Steven Maijoor, chairman of the EU’s European Securities and Markets Authority said blockchain may offer quicker and cheaper settlement of trades but may pose risks concerning privacy and governance.

ESMA will publish a discussion paper next month.

“We need to be prepared in case blockchain is successful. It’s important enough to look into it, but that’s still very far away from saying this will be a new development," Maijoor said. Reuters

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 20 May 2016, 09:34 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App