Financial groups betting on the promise of blockchain technology should consider covering the cost of fraudulent transactions, much as banks already do for credit cards, one of the world’s most powerful markets regulators has urged.
Greg Medcraft, who chairs the International Organization of Securities Commissions (Iosco), a global standards body for the world’s securities watchdogs, said the technology was potentially “good for investors and issuers” but it still needed to reassure ordinary investors that their transactions are safe.
“One way to get consumer confidence is that someone has to look after the issue of fraud,” he told the Financial Times on Monday. “At least at the start, exchanges will have to guarantee the customer behind [the trade].”
Mr Medcraft’s comments come as the world’s largest exchanges step up their experiments with a technology few were even contemplating a year ago.
Blockchain is a marriage of computing power and finance. It allows a digital asset to be moved electronically between counterparties without using a central ledger to record the transaction. The technology aims to prevent fraud by using a shared digital public database that is continuously maintained and verified by all the other computers involved in a chain of transactions.
Proponents say the technology could speed up slow and inefficient back offices and save billions in the amount of collateral that is currently required by the global financial system. Blockchain databases could also cut transaction costs and potentially remove the need for market middlemen including banks and settlement houses.
To date, blockchain has been used primarily for transactions involving the digital currency bitcoin.
Use of the technology in more common financial products took a big step forward last week when the Australian Stock Exchange said it would become the world’s first market to settle equities trades using blockchain.
The US start-up Digital Asset Holdings, which will supply the project’s technology, has drawn investment from JPMorgan, Citigroup, Deutsche Börse, CME Group and ICAP, among others, in its $52m fundraising.
Mr Medcraft oversees the ASX as chair of the Australian Securities and Investments Commission. He said that Iosco would meet next month to discuss its next steps on blockchain. They range “from thinking about setting up working groups to possibly setting global standards”, he said.
The meeting in Madrid next month will also have presentations from Blythe Masters, chief executive of Digital Asset Holdings and from Setl, a UK-start up that is currently raising funds to commercialise its technology.
Separately, the DTCC, which settles payments in the US securities market, also said on Monday that blockchain technology may not be a cure-all for financial markets infrastructure. The industry may achieve improvements by standardising industry workflows and using cloud computing to manage vast amounts of data, it said in a white paper.
Blockchain technology “is immature, unproven, has inherent scale limitations in its current form and lacks underlying infrastructure to cleanly integrate it into the existing financial market environment”, the DTCC warned. It also called for common standards to avoid “a new jumbled, disconnected maze” of blockchains around the world.