Blockchain plus smart contracts equals boon for regulators

Of the many benefits to capital markets promised by smart contracts and blockchain technology, none are more important than those to be gained by regulators. Indeed, regulation was one of the main themes touched upon by panelists from CME, Geopay, PwC, Symbiont, and TD Bank at the Mankoff Company’s After-the-Bell discussion this past Wednesday (February 24) in Chicago, which addressed the blockchain as a game-changing technology.

Regulators have a difficult job. While the vast majority of regulated firms conduct their businesses in an ethical and compliant manner, compliance has become increasingly expensive and complicated in recent years, and regulators themselves admit they do not have adequate technology to do their job. And while they are certainly looking to catch the “bad actors,” even the best-intentioned participant firms can fall out of compliance as they try to meet ever-growing reporting requirements.

That said, regulators have inadequate surveillance technology and often cannot detect fraudulent activities until well after the fact. Having a single, authoritative record of all transactions at their fingertips will not only allow regulators to do their jobs in a more efficient manner, it will also make it less costly for firms to comply – preventing systemic and reputational damage. Thus, smart contracts on a distributed ledger will help regulators and participants restore confidence in the markets to Main Street.

Smart contracts on the blockchain: A benefit for participants and regulators

Think of all the blood, sweat and tears that have gone into creating the Consolidated Audit Trail (CAT) to date, which the SEC recently announced should go live by 2017. While the creation of CAT came at the price of several millions in actual costs (and untold millions more in opportunity costs), a market using smart contracts on a distributed ledger will create a CAT as a natural byproduct and with very little, if any, additional effort.

Such use of smart contracts will also be easier and cheaper for regulated entities to meet compliance requirements. With all of the transaction data transparent and readily available, it won’t take a small army months to dig through records to hand over. That makes compliance less burdensome for the entities, and delivers the required data to regulatory bodies with consistency and accuracy.

The current populist narrative around Bitcoin would have us believe that the crypto world is strictly for transactions of a nefarious sort – illicit drugs, arms and even murder for hire (e.g. Silk Road). The fact of the matter is that the FBI was able to track down “The Dread Pirate Roberts” of Silk Road fame, specifically because of the immutable nature of the blockchain and the inability to change or hide transaction records.

Restoring confidence via smart contracts

It will take time for the technology to mature and be fully understood. Some, desperate to preserve their status quo positions, will intentionally obscure the learning in an attempt to retain the lion’s share of rewards for themselves while leaving scraps for their clients.

As with any new technology, from railroads to the Internet, there are many challenges yet to be overcome in the adoption of smart contracts on distributed ledger technology. But anything that simultaneously increases security, reduces risk and costs, while also enabling better regulation and easier compliance, eventually must rise to the top.

Our industry can finally rid itself of a never-ending stream of “black-eyes” (and fines!) and feel proud for proving that the system is in fact not rigged.

This post was written for Paragon by Mike Ross.