Government Think Tank Warns About Blockchain Risks

A United States government entity called the Financial Stability Oversight Council (FSOC), has released its annual report this week and has highlighted a warning about peer-to-peer lending practices and distributed ledger systems within the paper. The FSOC is an organization that provides financial research since it was established in 2010 by the Dodd–Frank Wall Street Reform Act.

This week the FSOC committee released its annual report, and it gave some insight into the council’s opinions on blockchain technology and market lending. The financial technology phenomenon has been providing businesses with vast opportunities to cut costs as well as add immutable security to the equation when using blockchain protocol. The FSOC acknowledged the attribute both peer-to-peer lending and distributed ledger systems have to offer but believe regulators need to be focused on these emerging technologies as more vulnerabilities could happen. The FSOC report even notes the Bitcoin blockchain transaction congestion stating:

“Distributed ledger systems may enable market participants to manage many types of bilateral or multilateral transactions without the direct participation of trusted third parties. Proponents of distributed ledger technology believe it could help to significantly improve efficiency by replacing manually intensive reconciliation processes and reduce risks associated with trading, clearing, settlement, and custody services.— Like most new technologies, distributed ledger systems also pose certain risks and uncertainties which market participants and financial regulators will need to monitor. Market participants have limited experience working with distributed ledger systems, and it is possible that operational vulnerabilities associated with such systems may not become apparent until they are deployed at scale. For example, in recent months, Bitcoin trade confirmation delays have increased dramatically and some trade failures have occurred as the speed with which new Bitcoin transactions are submitted has exceeded the speed with which they can be added to the blockchain.”

With blockchain technology the government committee warns, there could be an array of associated risks involved. This also includes the FSOC’s opinion that many active users have little technical knowledge which could lead to unnecessary vulnerabilities. The FSOC’s opinion comes as a coincidence during the recent DAO debacle which could’ve used more technical insight before it was deployed. Just yesterday Litecoin creator, Charlie Lee also highlighted a similar opinion for the need for people with technical skills stating, “In the future, we are going to hire hackers to look over a smart contract just like we hire lawyers to look over a contract today.”

The FSOC also mentioned that the industry surrounding blockchain technology covers many borders and regulatory policies on the global level can differ in each country. The organization calls for standard and vigilant regulatory monitoring in order to curb fraud and shady business behavior. The paper giving warning to various risks involved with distributed ledgers also provides a very positive outlook concerning the technology. It highlights many attributes blockchains could possibly enhance to transform traditional financial markets. The FSOC paper explains:

“Distributed ledger systems have the potential to change the way some asset classes are traded and settled. Financial regulators have often worked with those market infrastructures and firms which facilitate trading and settlement, such as exchanges, dealers, and clearinghouses, to monitor markets and, in some cases, regulate market activity. To the extent that distributed ledger systems ultimately reduce the importance of these types of more centralized intermediaries, regulators will need to adapt to the changing market structure. Furthermore, since the set of market participants which makes use of a distributed ledger system may well span regulatory jurisdictions or national boundaries, a considerable degree of coordination among regulators may be required to effectively identify and address risks associated with distributed ledger systems.”

The U.S. government research commission enacted by the Dodd–Frank Act also warns of peer-to-peer lending most likely due to concerns surrounding the Lending Club these past few months. The FSOC believes marketplace loans could be stifled because of the risks involved with this popular practice. With peer-to-peer lending growing exponentially and blockchain technology on the tables of many corporate board rooms, and the tip of investors tongues the government think-tank is saying to take precaution. But the FSOC also recognizes the significant potential blockchain technology holds “by improving the speed and accuracy of settlement systems, distributed ledger systems could reduce the counterparty and operational risks which arise when financial assets are exchanged.”

Source: Financial Stability Oversight Council Annual Report, Twitter  

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