Federal Reserve Issues Research Paper on Blockchain Technology

December 20, 2016
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Will the Federal Government Establish Policy Regarding Blockchain Technology?

The Federal Reserve Board recently published a research paper entitled, “Distributed Ledger Technology in Payments, Clearing and Settlement.”  While not necessarily groundbreaking, the report signals that the federal government is moving towards establishing a national policy regarding blockchain technology.block chain technologySeveral years ago, the Federal Reserve indicated that it did not have any plans to regulate digital currency. However, that doesn’t mean the board isn’t paying attention. This fall, Federal Reserve chairwoman Janet Yellen acknowledged the potential of blockchain in remarks before the House Committee on Financial Services. She said, “It could have very significant implications for the payments system and the conduct of business. We want to foster innovation. I think innovation using these technologies could be extremely helpful and bring benefits to society.”

Distributed Ledger Technology

The Federal Reserve report focuses on distributed ledger technology (DLT), which the Fed acknowledges is an imprecise term referring to a “combination of components including peer-to-peer networking, distributed data storage, and cryptography that, among other things, can potentially change the way in which the storage, recordkeeping, and transfer of a digital asset is done.”

The research paper focuses on how the technology can be used in the area of payments, clearing, and settlement, as well as its broader impact on financial markets. It is the product of consultations with 30 key industry stakeholders, including market infrastructures, financial institutions, other government agencies, technology firms, and industry consortia.

“As part of its core objective to foster the safety and efficiency of the payment system and to promote financial stability, the Federal Reserve has a public policy interest in understanding and monitoring the development of innovations that could affect the structural design and functioning of financial markets,” the report states.

Application of the Technology

The Federal Reserve highlights that DLT presents a wealth of opportunities for improving financial transactions, although it is still in its early development stages. “The driving force behind efforts to develop and deploy DLT … is an expectation that the technology could reduce or even eliminate operational and financial inefficiencies, or other frictions, that exist for current methods of storing, recording, and transferring digital assets throughout financial markets,” the report states.

Despite the promise of DLT, the Federal Reserve report notes that the technology must clear several hurdles before it can be widely adopted. Among the challenges that may hamper the practical implementation and potential long-term adoption of blockchain technology, the Federal Reserve cites several business, technology, risk management, and financial design challenges. With regard to risk management, the blockchain report explores a number of business law concerns, including the licensing of companies that provide DLT services, ownership of digital assets, compliance with the Bank Secrecy Act (BSA) and anti-money-laundering (AML) requirements, and the finality of settlements.

For businesses interested in learning more about blockchain technology, the Federal Reserve paper provides a comprehensive overview of the fundamentals. It also surveys many of its potential applications, as well as the potential risks and benefits. As far as future regulation of distributed ledger technology, it appears that the Federal Reserve wants to see how the technology evolves over time before launching an official rulemaking.

This post is a part of a series focusing on blockchain technology, bitcoin and cryptocurrency – more on this can be found below: