Bitcoin and blockchain have received widespread attention over the past year, and many people are considering the possible breadth of application of these new technologies. Blockchain consists of a multitude of technologies, which work together to create a ledger of records arranged in data objects called blocks. Linked together through encryption, these blocks provide a framework for digital currencies, like bitcoin, to conduct secure online transactions.
Over the last 3 years, over $1 billion has been invested in blockchain technologies. According to a report by Magister Advisors, blockchain investment will increase by another $1 billion in 2017.
Blockchain is best suited for environments where there is shared information and distrust or a need for validation between two parties. Bearing this in mind, set out below are some thoughts on aspects of financial services likely to be impacted by the development of blockchain technology.
1. Payments and Clearance - Financial markets are likely to see a large shift in the processing of transactions. Blockchain and digital currencies make it possible to eliminate certain elements of distrust in transactions (i.e. the middleman). This simplifies the clearing process, and will change the role of intermediaries. The impact is likely to be seen on a variety of transactions including escrow arrangements and simple person-to-person wire transfers, as blockchain allows users to introduce a wide range of validation mechanisms. This has the potential to have a significant impact on banking and payments systems. For example, the Bank of Canada has undertaken a project to “build a proof of concept wholesale interbank payment system using a distributed ledger.”
2. Capital Markets - As blockchain technology makes it possible to transfer value more efficiently, the flow of capital is likely to shift as well. The greatest impact to date has occurred in crowdfunding. The rise of Initial Coin Offerings (“ICOs”) has offered a unique method of funding projects. One of the most successful ICOs in Canada spurred the launch of Ethereum, a decentralized platform that runs smart contracts on blockchain. There is likely to be a continual shift in how businesses access capital and financial support in Canada, especially at the start-up level. Additionally, we may see new and unique financial instruments created. For example, in the US there have been proposals to develop a Bitcoin ETF.
3. Operations - One of the major applications of blockchain technology will be in back office functions and internal operations such as reconciliation or clearing processes. It is expected that these internal, back-end types of applications of blockchain are what large financial institutions will likely invest in initially. Generally, blockchain is expected to improve internal banking processes such as reconciliation and know your client (KYC) processes.
4. Currency - Blockchain and digital currencies are expected to change the way parties transact in coming years. It has been suggested that the Government of Canada is likely to issue a Canadian Dollar digital currency in the future. The Royal Canadian Mint has already issued a version of this known as MintChip. The Bank of Canada announced, in a closed media session at the 2016 Payments Panorama conference, that they had been experimenting with “The Jasper Distributed Ledger Settlement Platform.” This project introduced the concept of a possible “CAD-COIN.” This has placed Canada in a unique position in comparison to other jurisdictions, as the government is actively exploring the applications of this technology.
The federal government has also been considering the effects at the legislative level. Canada’s standing Senate Committee on Banking Trade and Commerce launched its study on digital currencies in March, 2014 and released its report in June, 2015. Overall, this technology has the potential to impact a multitude of legislative regimes which may need to change to cope with the new technology. At the forefront of this will be anti-money laundering, securities and tax legislation. However, as the area becomes more robust, it is likely to impact other general areas of law such as consumer protection and even basic principles of contract law.
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