FinTech Disruptor, Blockchain, Makes Its First Splash on Wall Street

By: Thomas Gaffney*| Staff Writer

On Monday January 9th,  the Depository Trust and Clearing Corporation (DTCC), which plays a major role in recording and reporting nearly every stock and bond trade in the United States, announced that it is replacing one of its central databases with a new blockchain style software inspired by the technology underlying the cryptocurrency Bitcoin.  Bitcoin is the World’s most popular cryptocurrency and was the originator of the new financial technology disruptor Blockchain.  The concept of Blockchain is essentially a “revolutionary approach to the age-old problem of trust.”  Blockchain is a decentralized network that produces a public ledger by recording transactions conducted on the network which are then verified by third parties. Because of its design, Blockchain cannot be changed or modified unilaterally, and therefore any changes made to the ledger need to be accepted by the entire network making it more reliable and secure than contemporary methods.

The institutions becoming involved with Bitcoin are not necessarily interested in using Bitcoin itself, but rather are interested in looking at the possibilities of the network and software that make it possible for individuals to transfer Bitcoins to each other instantly all over the globe.  There has been massive speculation in the financial industry about the possibilities and potential of Bitcoin’s Blockchain technology, and most, if not all, of the World’s largest banks have announced that they are researching the possibilities of how to harness and utilize this new technology.  However, banks seem to be holding their cards close to their chest. Because up until the D.T.C.C. announced it would be using a blockchain style software, there has not been any tangible steps taken by Wall Street institutions to utilize the technology.  The D.T.C.C chose to finally utilize the technology because “it allows information to be recorded in real time without the bottleneck that central authorities generally introduce. The decentralized nature of the technology also makes it harder for attackers, or hackers, to take control of the network.”  If the database software is a success, then the D.T.C.C. plans on using it to move money instead of just simply recording the information of trades and derivative swaps.

Although there seems to be a general consensus on Wall Street that Bitcoin and Blockchain technology are set to disrupt the banking and finance industry, one thing that remains uncertain is how governments will be able to regulate cryptocurrencies and decentralized ledgers such as Bitcoin and Blockchain.

This regulatory question has arisen primarily from Bitcoin’s increased use in business transactions and its popularity as financial investment.  Judges and legislatures do not know if Bitcoin should be classified as a commodity or a currency.  This lack of consensus creates all sorts of legal problems such as: bankruptcy, taxation, and criminal proceedings.  The rule of law has one main purpose, to protect the rights of the individual living within its borders, and regulators are failing this purpose by failing to agree on how Bitcoin should be classified. The law needs to be consistent for individuals to know how to make decisions to protect their property interests.

However, several federal government agencies have conflicting rules on how Bitcoin will be treated.  The Internal Revenue Service has decided that it will treat Bitcoin and other cryptocurrencies as a property; the Financial Crimes Enforcement Network considers it “a medium of exchange that operates like a currency in some environments;” and to make it even more convoluted, the Securities and Exchange Commission has treated it as a security in some proceedings and a currency in others.

Blockchain does not necessarily have the same regulatory issues or questions as Bitcoin, but the decentralized nature of Blockchain makes it more difficult for regulators to have control over the ledger.  It is clear that technology will serve investors and financial systems in the future.  However, regulators have continued to struggle to take an appropriate stance in response to Blockchain developments;  “On one hand, there is nothing yet to regulate, with no known commercial-scale financial blockchain applications. On the other hand, it is still unclear why or how regulation should change in anticipation of technological development.”  This is not the case anymore. The D.T.C.C.’s decision to shift one of its main databases to a Blockchain style software is proof that Blockchain is starting to become less of an idea and more of a reality.  It is time for regulators to come together and decide how to regulate this FinTech disruptor.

Thomas Gaffney is a third year law student at Wake Forest University School of Law. He holds a degree in Political Science and a minor in History from The Pennsylvania State University.  Thomas is also a published freelance equity research author on SeekingAlpha.  Upon graduation, he plans to practice in the areas of banking and finance law, with a specialization in Financial Technology and Banking Regulation.