By J. Preston Carter, J.D., LL.M.
Whether Bitcoin will “significantly alter the way money changes hands around the world” will depend on interactions between factions in the virtual currency world and financial regulators, according to a paper by David Wessel, Director, and Peter Olson, Research Analyst, at the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution. Their paper, part of the Hutchins Center Explains series, is titled “How Blockchain could change the financial system (part 1 and part 2).”
Blockchain. The authors contend that Bitcoin and its underlying technology, blockchain, have the potential to challenge the dominance of the big players in payment systems and significantly reduce the cost of financial transactions and the speed with which they are completed. They quote a recent essay by Bank of England economists as saying, “The key innovation of digital currencies is the ‘distributed ledger’ which allows a payment system to operate in an entirely decentralized way, without intermediaries such as banks.” This distributed ledger, blockchain, avoids the centralized ledger of central banking systems.
Virtual currency factions. The authors highlight two factions in the virtual currency world. R3CEV, a blockchain consortium made up of more than 40 of the world’s largest banks, thinks the new technology could make transactions between banks much less costly than under the current system. Its Managing Director, Charley Cooper, says that his firm is willing and eager to work with regulators, but there’s no one person to talk to: “In the U.S. it’s incredibly difficult because it’s unlike many other countries where the regulators fall under a single umbrella.”
Barry Silbert, founder and CEO of the Digital Currency Group, a company that invests in and builds Bitcoin-related companies, warns regulators that innovators “are not going to sit back and wait” for the regulators to act before moving.
Regulators. The authors quote Jeffrey Stehm, now of Promontory Financial, as saying when he was a senior staffer at the Federal Reserve Board that most regulators “don’t wake up in the morning and want to be resisters to new things and don’t want to be resisters to technology, but on the other hand they have a mandate from the governments, whether it’s state or federal, to do certain things.”
The paper also cites Sayee Srinivasan, of the Commodity Futures Trading Commission, as suggesting that entrepreneurs “take the path of least resistance [meaning, use cases where legality isn’t a question] because if you are going to be waiting for regulators to change things, it just takes a lot of time because writing rules is a very, very difficult, challenging, risky, painful process and that’s not in our DNA to go and quickly change rules....”
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