Bitcoin is somehow the Elephant in the room when it comes to discussing the ‘future of money’. However, before judging whether it is a good alternative to replace money as we know it it is helpful to think about how money has evolved in the past, why it has evolved and what the legal implications of these changes are.
In a blockchain/DLT environment, the parties as well as the competent courts and regulators will lose authority over the enforceability of transactions or smart contracts once they were recorded on the blockchain.
Even though Bitcoin was conceived as a grassroots democracy it cannot live up to this standard – it is entangled in ideological and economic internal conflicts. Similar scenarios might occur insight a blockchain financial network, even if the latter will be permissioned structures.
Beyond the spectacular cases of illegal or illicit use of virtual currencies (see in particular the Silk Road case), concerns about money laundering and terrorist financing surfaced very early on, leading to relevant regulation in New York and intense debate in Europe and elsewhere, including at FATF in Paris. Two characteristics inherent in blockchain technology considerably facilitate illegal activity. However, in the Bitcoin environment this is more of a problem than in any future DLT network set up by regulated entities.
The function of blockchain systems used in financial markets might at some future point in time place them among critical infrastructures such as settlement systems and CCPs. Blockchain financial networks would provide a service that would not be easy to replace should they fail to function properly. As networks linking a multitude of financial market actors, potentially of different types, they are also highly interconnected. Hence,, such networks are destined to become important in terms of financial stability once they have attracted a certain volume of assets and a critical number of users. It might therefore be necessary to regulate blockchain financial networks with a view to ensuring that they are resilient and do not contribute to systemic risk but, ideally, help to reduce it.
Effective regulation requires a suitable addressee against which the rules can be enforced. In the case of virtual currencies, such as Bitcoin, it appears difficult or well-nigh impossible effectively to regulate the person or persons controlling the software (which I call the ‘software platform provider’) as they are typically informally associated individuals that may be scattered around different jurisdictions. Where banks and other regulated financial institutions are involved, regulatory capture looks more straightforward.
In this post, I explore the third fundamental characteristic of blockchain financial (and other) networks: unstoppable execution. This idea is at the same time at the basis of smart contracts. It means that computer code is designed automatically to execute contractual duties upon the occurrence of a trigger event, or, in other terms, the complete excision of human discretion from execution.
A distributed record needs a second (and a third) element to form a blockchain network. This post discusses the necessity of a mechanisms guaranteeing that the updates of records reflect the truth.
Three characteristics of blockchain technology have the potential of turning our understanding of how the market functions upside down. In this first post of a series of three I discuss the concept of the distributed ledger that lies at the heart of blockchain and the consequential disintermediation of the market, doing away with back office functions and intermediation.