The Slow Slog to Regulatory Recognition of Blockchain and Cryptocurrencies Continues

by Tim Sloane 0

The Federal Reserve continues to create an evaluation process to help it select an approach that will provide faster payments, but to suggest this is a study of blockchain and cryptocurrencies as done in this article in CoinTelegraph is a bit of a stretch:

“The financial world has spent much of 2016 co-opting Bitcoin’s Blockchain technology for commercial use, aiming to catch up to quantum leaps in efficiency and payment innovations used by Bitcoin’s digital currency. Now, the world’s leading central bank, the Federal Reserve of the United States, is going to investigate the future of monetary payment technology. This week, they have begun new studies for 2017 that will seek to understand advanced digital payment technologies, including “Fintech” and Bitcoin’s Blockchain technology.”

The Federal Reserve Board is certainly interested in blockchain and cryptocurrencies as indicated by this speech given by Governor Lael Brainard at the Institute of International Finance Blockchain Roundtable in April 2016, which is worth a read. The Fed’s Faster Payments initiative includes blockchain and cryptocurrency proponents, such as Ripple Labs, but the exact nature of the 19 proposed solutions have not been made public by the Fed. What is known is that in May of 2016 three companies told American Banker that they had submitted proposals which included Dwolla with BBVA Compass, The Clearing House with FIS, and Ripple Labs. One would clearly expect that the Ripple Labs submission was for its blockchain and cryptocurrency solution. But for anyone expecting fast results from the Faster Payments initiative this should give pause:

‘ “The task force review process is designed to facilitate diverse stakeholder input for the benefit of potential operators of faster payments capabilities, end users of these systems, and the public at large. The goal of this process is to create broad adoption of these capabilities by consumers and businesses over the coming years,” added Sean Rodriguez, the Federal Reserve’s Faster Payments Strategy Leader and chair of the Faster Payments Task Force.
This two-part study will look have two separate task forces consisting of almost 500 members who will be looking at making a faster payment system ubiquitous in one group and the other will focus on enhancing payment system security. There have already been 19 proposals created, and the first report should be completed by January 2017, while the second should be completed by “mid-year” of 2017.” ‘

Note that the result of this review is not a selection of a proposal; it is a rating of the proposal against the criteria identified. It should be noted that in the speech given by Governor Lael Brainard he made the following observation:

“At this stage, such a sea-change may sound like a remote possibility, particularly for the high volume and highly regulated clearing and settlement functions of the wholesale financial markets. But profound disruptions are not unprecedented in this arena. In the early 1960s, the use of computerized book-entry securities systems to streamline custody, clearing, and settlement in the securities markets may have seemed like a technologist’s pipe dream. But these technologies became an important part of industry-wide changes in the 1970s. Today we rely on these types of systems for the daily operation of the markets.”

Implementing settlement functions of banks on a blockchain under federal government auspices in a decade would be moving extremely fast and many of the challenges were highlighted by Mercator in the publication “Understanding Risk in Bitcoin and Bitcoin Exchanges,” but regardless it is unlikely startups can wait a decade and so should look elsewhere for markets that are easier to enter, as was made clear in the article “Blockchain Advocates Wake Up: State That Blockchain Won’t Disrupt Banks First.”

Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group

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