Fed’s Brainard cautious over quasi-anarchic boom of blockchain technology

While the FinTech world celebrates the increased mainstream adoption of distributed ledger technology, with both venture capital and the banking industry buying out and partnering up with startups that look for new ways to disrupt the technological status quo and introduce multiple solutions, Federal Reserve Governor Lael Brainard advised caution and contemplated on the potential collateral damages of the current quasi-anarchic way that blockchain technology is being developed.

Acknowledging its potential for removing friction in clearing and settlement without the help of intermediaries both within and across borders, Brainard said that the Fed’s engagement over the application of DLTs would be guided by the same principles of efficiency, safety and integrity, and financial stability applied in cases such as the use of computerized book-entry securities systems to streamline custody, clearing, and settlement in the securities markets in the 1970s.

“Today, many industry participants are experimenting with distributed ledger technology in controlled, permissioned environments,” he said. “If some of these experiments bear fruit, it will be important to address the challenge of how they would scale and achieve diffusion. In addition, determining exactly how the different distributed ledger technologies interoperate with each other, and legacy systems, will be critical. New and highly fragmented ‘shared systems’ may create unintended consequences even as they aim to address problems created by today’s siloed operations.”

“Since distributed ledgers often involve shared databases, it will also be important to effectively manage access rights as information flows back and forth through shared systems. There may well be a tradeoff between the privacy of trading partners and competitors on the one hand, and the ability to leverage shared transactions records for faster and cheaper settlement on the other hand. And of course, development of sound risk-management, resiliency, and recovery procedures will be necessary to address operational risks.”

“We are bringing together the best thinking across the Federal Reserve System, spanning key areas of responsibility, from supervision to community development, from financial stability to payments.”

“As policymakers, we want to facilitate innovation where it has the potential to yield public benefit, while ensuring that risks are thoroughly understood and managed. That orientation may have different implications in the arena of consumer and small business finance, for instance, as compared with payment, clearing, and settlement in the wholesale financial markets”, Brainard concluded.

While applauding technological evolution, the Federal Reserve’s role is to make sure that the disruption doesn’t damage the financial system or the economy, in a “better safe than sorry” kind of policy as the DLT industry is yet to mature.