Wed. Nov 25th, 2020

Planet Compliance

Innovation & Regulation in Finance

The basics of Blockchain (Part II)

2 min read

Continuing from Part I of “The basics of Blockchain”:

Risks and weaknesses of blockchain

However, the use of blockchain also incurs downsides and risks:

The time to implement and uncertainty as to what to expect are key aspects in that regard. The technology needs to be adapted for financial markets and products. So far it is not confirmed that large volumes can be settled since for now only small volumes have been tested. At least in a time of transition between systems there is always an operational risk.

Due to its nature, an error in a transaction can’t be simply cancelled since to unwind it, it requires the approval of all participants and subsequent blocks would need to be changed to.

Regulation will play a big role and authorities around the world have shown great interest in the topic (see our separate series of posts of regulatory country reports on the subject). Rules with regard to AML need to be established as well as common standards and governance, which will be time consuming.

Robust cash ledgers will be required and the question of whether the system can be hacked, for example, in order to change data, needs to be addressed as will be the aspect of cybersecurity in general.

Outlook

Though it can be considered still early days for the mainstream application of the blockchain technology, it is obvious that it offers a wide array of possibilities and it is likely to bring significant change to the financial industry. Having said that as shown above it will take time and several obstacles need to be overcome. However, it seems clear that the question of the adoption of blockchain is not a question of if, but rather when it is going to happen.

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