Regulators must be prepared to strike a balance on blockchain technology

The report suggests that “[g]iven the modest scale of the Canadian market, there is potential to give smaller, privately held Canadian companies access to a liquid financial market.” The report also recommends that blockchain technology could be used in over-the-counter (OTC) markets, generally, and to trade physical assets.

“This would increase transparency in financial markets, making it easier for regulators and supervisors to obtain real-time information,” the report states.

The adoption of blockchain technology would likely transform financial market infrastructure, the report notes.

“The ultimate implication is that many intermediaries such as clearinghouses and settlement agents could lose their unique positions of being necessary third parties for some services associated with the clearing and settling of transactions in financial markets,” the report says. “Indeed, some institutions might disappear altogether, possibly being supplanted by intermediaries such as banks or brokers that give access to an integrated trading and post-trading system.”

The question for policymakers is just how involved they should be in the development and implementation of blockchain technology. The challenge, the report notes, is that the some of the most promising uses for blockchain involve critical infrastructure; yet, governments generally don’t have the expertise or incentives as the private sector to pursue new technologies.

“Hence, blockchain will test whether public-private partnerships can really implement frontier technology in a cost efficient and safe way,” the report states.

The report concludes that regulators should focus on designing a principles-based regulation regime that sets high safety standards and provides a stable legal environment, without disrupting the development of the technology.

“Given the uncertainty of how blockchain technology will evolve, it seems reasonable, however, to rely only on a relatively narrow set of guiding principles with a view that allows the technology to develop flexibly in different directions over time,” the report states.

Regulators should aim to ensure that the technology generates efficiencies for users rather than simply redistributing excess profits among intermediaries, the report adds.

“The challenge for regulators,” says Jeremy Kronick, senior policy analyst with the C.D. Howe Institute, in a statement, “is to balance letting markets figure out how to best use this technology while ensuring consumer safety and efficiency.”

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