{"id":33058,"date":"2016-02-26T16:17:02","date_gmt":"2016-02-26T22:17:02","guid":{"rendered":"http:\/\/news.medill.northwestern.edu\/chicago\/?p=33058"},"modified":"2016-02-26T16:17:02","modified_gmt":"2016-02-26T22:17:02","slug":"blockchain-could-decentralize-clearinghouses-regulators-take-notice","status":"publish","type":"post","link":"https:\/\/news.medill.northwestern.edu\/chicago\/blockchain-could-decentralize-clearinghouses-regulators-take-notice\/","title":{"rendered":"Blockchain could decentralize clearinghouses; regulators take notice"},"content":{"rendered":"

By Steven Porter<\/strong><\/p>\n

J. Christopher Giancarlo released a podcast last month alerting financial markets to the biggest trends he expects them to face in the coming decade. Among the most pressing issues he named were cyber threats and disruptive technology.<\/span><\/p>\n

Giancarlo, a commissioner with the U.S. Commodity Futures Trading Commission, devoted a good portion of his talk to the increasingly digital and automated space in which traders work. As much as 70 percent of regulated futures trading in the U.S. is now done by an algorithm, he noted.<\/span><\/p>\n

\u201cIt is clear that finance is increasingly becoming an industry where machines and humans are swapping their dominant roles, transforming modern finance into what scholar Tom Lin has called \u2018cyborg finance,\u2019<\/span><\/a>\u201d Giancarlo said.<\/span><\/p>\n

Despite his earnest tone, Giancarlo suggested marketplace stakeholders might already be on the right track by investing tremendous resources in a promising innovation regarded by some as controversial: blockchain technology.<\/span><\/p>\n

Blockchain, a decentralized networking protocol made famous by the cryptocurrency Bitcoin<\/span><\/a>, could prove useful in the financial sector as well, according to proponents. Major players in global finance have responded by forming coalitions to test whether implementing blockchain would be feasible.<\/span><\/p>\n

Chicago-based CME Group Inc. joined one such coalition, The Linux Foundation\u2019s Hyperledger Project<\/span><\/a>, earlier this month.<\/span><\/p>\n

\"Chicago
The iconic Chicago Board of Trade building has been around more than 80 years, surviving one technological innovation after the other. The application of blockchain technology in the financial sector could be among the biggest innovations yet. (Steven Porter\/MEDILL)<\/figcaption><\/figure>\n

The idea is to promote efficiency and transparency in trading by spreading ledger data for all traders out across a decentralized network, Robert Sams, CEO of Clearmatics Technologies Ltd., told regulators during a CFTC Technology Advisory Committee meeting this week.<\/span><\/p>\n

With a decentralized ledger, each node in the network would maintain its own record of all transactions in the marketplace, running computations independently. An algorithm would then certify each transaction by surveying the results reached by the independent nodes.<\/span><\/p>\n

\u201cBut in today\u2019s system,\u201d Sams continued, \u201cconsensus on the global state of who owns what or who owes what to whom is obtained by many iterations of reconciliation, which is usually labor-intensive, expensive and slow.\u201d<\/span><\/p>\n

Blockchain technology could make a decentralized clearing network possible, perhaps offering an alternative to central counter-party clearinghouses, Sams added.<\/span><\/p>\n

The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed more than five years ago, required that certain swaps be cleared in exchanges. Certain transactions that previously took place outside exchanges entirely have since brought additional revenue to CME Group Inc. and others<\/span><\/a>.<\/span><\/p>\n

But Giancarlo, the CFTC commissioner, suggested policy reforms might be in order, arguing in his podcast that Dodd-Frank focuses on market failures of the past and doesn\u2019t provide any guidance on the biggest current and future threats to U.S. financial markets.<\/span><\/p>\n

\u201cJust as peacetime generals are always fighting the last war and economists fight the last depression, so too to do financial regulators outlaw past market abuses that are not a looming threat to our financial markets and economies.\u201d<\/span><\/p>\n

Why blockchain?<\/h3>\n

Ben Lloyd Pearson, an open source technologist with Samsung Open Source Group who has worked with The Linux Foundation in the past, said the potential applications for blockchain technology are widespread because it can be used to verify any digital transaction.<\/span><\/p>\n

\u201cThe last time I had to wire money out of my bank account, I had to go into the office, meet with a manager, fill out a bunch of paperwork, pay them like $20 and wait seven to 10 days,\u201d Pearson said. Had he used Bitcoin, he could have sent money directly to an address without a bank\u2019s verification.<\/span><\/p>\n

Whereas blockchain was viewed as a \u201cfringe culture\u201d two to three years ago, there\u2019s since been a corporate awakening, Pearson said.<\/span><\/p>\n

\u201cWe\u2019re at a point where all of the big financial companies have realized that they\u2019re going to have to start getting involved in blockchain technology,\u201d Pearson added.<\/span><\/p>\n