Blockchain technology has the potential to revolutionize how financial institutions record, process, report and verify financial transactions. Many large financial institutions have already begun to invest in the technology. As momentum behind blockchain continues to grow, new services applying or leveraging the blockchain information will proliferate. Laws will need to address the various financial activities that will be shifted to blockchain technology.
Blockchain employs distributed ledger technology. Nodes across the blockchain network apply every transaction to their copy of the distributed ledger and then pass on that transaction to other nodes, allowing a group of computers to maintain a shared public ledger. The math behind blockchain links all transactions to previous transactions; instead of tracking account balances, blockchain technology uses linkages to previous transactions to verify ownership of funds.
As everyone in the blockchain knows of the transactions, trusted third-party intermediaries are not needed. Eliminating the need for these intermediaries leads to increased efficiency, reduced costs, and less possibility of human error.
Blockchain transactions are transparent, accurate, traceable, programmable, accessible, and done in real-time. While producing enormous potential applications for financial institutions, a host of information governance issues must be considered.
Applications for Financial Institutions
• Accounting & Auditing: Accountants, auditors and other intermediaries could gain unprecedented access to all transactions of an organization in real-time. Financial corruption and deceitful accounting practices could be avoided as it is not possible to interfere with the transaction record of a blockchain.
• Reporting: Software applications leveraging the blockchain information could change the way companies report, manage, and communicate their financial reporting obligations leading to increased automation, accuracy, and real-time reporting.
• Trading: Blockchain could give rise to instant settlement as there may be no need for third party intermediaries or clearing houses. This would lead to reduced costs and increased liquidity.
• Payment Systems and Fund Transfers: The impact of blockchain technology will be huge for transferring funds between people and institutions, including across borders.
Information Governance Considerations
• Any real-time access to transactional information stored on the blockchain that is provided to shareholders, analysts, auditors, and other intermediaries would need to ensure data privacy protection and compliance with other laws and regulations regarding the access to and disclosure of information.
• Depending on the type of financial transaction using blockchain, all legal and regulatory requirements governing the particular service would need to be followed (e.g., record-keeping and reporting for anti-money laundering, tax, banking, securities and payment system compliance). In many cases, the data underlying the digital record will still have to be authenticated and the certain supporting documentation may still need to be stored.
• Complex jurisdictional issues may arise from an information governance perspective as the blockchain network will not have a specific location, similar to cloud technology.
• As blocks in the blockchain are linked together and immutable, this may clash with the rights of individuals to have their personal data deleted within a specific period of Any real-time access to transactional information stored on the blockchain that is provided to shareholders, analysts, auditors, and other intermediaries would need to ensure data privacy protection and compliance with other laws and regulations regarding the access to and disclosure of information. time and the need to avoid over-retention of personal information in compliance with privacy laws.
• Standards will need to be developed to define the type and format of transactional information to be stored in the public ledger.
• The evidentiary value and legal enforceability of blockchain information will need to be considered.
The future blockchain technology in the financial sector is exciting but at the same time raises certain challenges from a risk perspectivethat will need to be addressed by users, lawyers, regulators and IT personnel.
Contributors - Lisa Douglas, Catherine Chen, and Marc Di Pierdomenico