Not so long ago, blockchain technology was still something of a peripheral concern for most traditional financial institutions. Seen mainly as simply a part of the underlying infrastructure behind virtual currencies like Bitcoin, it was not considered a priority by many banks.
But this view is now changing rapidly as its potential to transform the way many key activities, from payments to stock trading, becomes more recognised. Indeed, one member of the US Federal Reserve’s board of governors Lael Brainard recently described it as the “most significant development in many years” for payments and settlements.
Central banks taking an interest
Indeed, Ms Brainard’s comments highlight how the Fed is taking a much closer interest in blockchain and what it can offer to the financial services sector. Finextra noted that the regulator will publish its own paper on the impact of distributed ledger technology such as blockchain later this year.
Elsewhere, the Financial Times reports that other countries around the world, including the UK, Russia and China, are also examining what the implications will be as the world embraces innovations such as digital currencies.
Victoria Cleland, chief cashier at the Bank of England (BoE), told the publication: “The technology is moving quickly. A lot of people think central banks are very risk averse, but we are thinking, ‘Are there opportunities to grasp innovation ourselves?’.”
However, there are a range of questions that these institutions will need answers to if blockchain technologies are to become a key part of the future banking landscape. Ms Cleland noted that blockchain and digital currencies would be “completely transformative”, so is not something organisations such as the BoE can take on alone.
Who takes the lead?
This may suggest that central banks are set to take a much more active role in the development of blockchain technology, but it remains unclear just how far they are willing to go when it comes to setting out new standards and regulations for the use of the technology.
Ms Brainard noted that like any new financial technology, the use of blockchain has the potential to either “ameliorate or exacerbate” traditional risks. However, the Fed’s key concern is whether these risks are made more or less transparent and how they are distributing among FIs and end-users.
She indicated that the Fed’s preference at this stage is still to take a fairly hands-off approach and allow banks to lead the way – as long as they remain within defined guidelines and best practices.
Ms Brainard said: “We expect the private sector to bear important responsibility for developing and deploying new financial technologies in a safe and sound manner, even as we all seek an innovative and efficient payment system over the long run.”
At the moment, much of the industry is still on the proof-of-concept stage when it comes to blockchain innovation, with full-scale rollouts forecast to be several years away. But given the pace of development in the technology since blockchain was first introduced in 2009, this may change.