The foundations of the Bitcoin protocol and the crypto-currency it supports first emerged in 2008 via a white paper circulated on a cryptography mailing list by a certain Satoshi Nakamoto. Soon thereafter, in January 2009, the first bitcoin transaction was recorded on the Blockchain1, a distributed ledger that is essentially a chain of blocks of information. Today, over seven years later, the Blockchain has become a hot topic of discussion and numerous reports have recently been published on its generic affiliate known as Distributed Ledger Technology (DLT).
If we look at the significant press coverage devoted to Bitcoin and Blockchain over the last six months, our initial reaction could be to discount the phenomenon as an example of Keynes’s animal spirits’ herding instinct, Girard’s mimetic forces, or as a simple fad. The craze has even prompted some prominent economists to call Bitcoin/Blockchain an “amazing example of a bubble”.2 Yet, there is significant factual evidence to show that the Bitcoin network and its derivatives have not only been resilient, but are continuing to draw interest and investors. Although we will avoid the quagmire of forecasting the future of Bitcoin and similar crypto-currencies, we believe that it is probably brighter than many think.
It is clear that the conceptual foundations of Bitcoin and its underlying distributed ledger, commonly referred to as the Blockchain, are now prompting many institutions to rethink their existing information systems and business processes. The financial services industry in particular, with its manifold payments and transactions, is currently investigating how distributed ledgers could be used to improve or optimize existing market infrastructure.
This report attempts to summarize the key issues of distributed ledgers and take a look at how they could be integrated into financial markets, especially at the posttrade level. Our approach is non-exhaustive and necessarily cross-disciplinary with a certain dose of foresight. We certainly do not claim to have mastered the subject: it is far too vast and complex and the wave of transformation too fast-moving to be addressed in a single general paper. But our investigation has convinced us that the disruptive potential of the technology is real. We hope that this report will provide a useful compendium on the subject for market infrastructure providers and many others who are considering the risks and opportunities that DLT could represent.
Alexis Collomb and Klara Sock
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