Lael Brainard, Federal Reserve Governor, made the case this Friday for blockchain technology in a speech delivered at the Institute of International Finance Annual Meeting announcing a “working group that is engaged in a 360-degree analysis of financial innovation across the broad range of our responsibilities” as well as a paper to be published later this year.
The governor stated that blockchain technology can allow for “significantly faster processing” and reduce costs in cross-border payments replacing a “long and opaque intermediation chains associated with current methods of correspondent banking.” For clearing and settlement, the use of blockchain technology where identical records are simultaneously shared among numerous nodes could be “compelling” as well as “provide coordination that facilitates exchange, clearing, and settlement of obligations” in commodities and derivatives markets which are currently heavily paper based. Brainard stated:
“The genuinely innovative aspect of distributed ledger technology combines a number of core elements that can be used to support the transfer process and distributed recordkeeping for digital assets and digital representations of assets. These elements include peer-to-peer networking… cryptography… and consensus algorithms…. We are paying close attention to distributed ledger technology, or blockchain, recognizing this may represent the most significant development in many years in payments, clearing, and settlement.”
Striking a now familiar tone with US regulators, the governor emphasized the benefits of innovation “while insisting that risks are thoroughly understood, managed, and controlled.” Indicating a close following of public blockchain developments, Brainard highlighted the need to secure private keys and “having protocols agreed at the outset to determine whether and under what circumstances to reverse transactions once they have been recorded in a distributed master ledger.”
Of significance is an acknowledgment that much of the innovation in the public blockchain space does not fit traditional laws and regulation, with authorities struggling to provide a measured response in setting up balanced rules and guidelines despite loud criticisms that the US regulatory regime is the worst out of seven global fintech centers.
There was no language of partnership here, nor any indication that the Fed is making any attempts to reach out to the public blockchain space, instead highlighting financial institutions and “technologists.” The governor calls Bitlicense a “noteworthy recent development” without pointing out any lessons learned. Particularly, the fact that it was an absolute disaster primarily due to New York regulators not giving an ear to public blockchain participants.
The governor further highlights “discussion by the OCC of a limited-purpose charter.” The OCC, however, is the regulator of national banks, with the first Comptroller being Hugh McCulloch, President of the Bank of Indiana. The numerous speeches the current comptroller has given regarding blockchain innovation have almost exclusively focused on banks, leading some to worry that bank specific regulations may be applied to garage start-ups, placing barriers before the space has had an opportunity to mature.
Nonetheless, the governor’s comments make it very clear that blockchains are a “genuine innovation” and have numerous benefits, thus fully shifting the debate from whether they should be employed to how blockchain technology is to be implemented to upgrade the financial system and, perhaps, fiat money itself.
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