Banking and Finance Law Daily Wrap Up, FINANCIAL TECHNOLOGY—Paper examines blockchain opportunities in financial services industry, (Feb 1, 2022)

By Colleen M. Svelnis, J.D.

The authors see significant blockchain-based opportunities available to the financial services industry, and explore potential applications of blockchain, while pointing out both the potential and unresolved legal questions.

Calling the emergence of blockchain technology “a historic opportunity for the banking industry to modernize,” a paper posed on the “Harvard Law School Forum on Corporate Governance” seeks to examine the opportunities presented by incorporating both public and private blockchains in banking services. The paper, Blockchain in the Banking Sector: A Review of the Landscape and Opportunities, authored by David L. Portilla, David J. Kappos, Minh Van Ngo, Sasha Rosenthal-Larrea, John D. Buretta, and Christopher K. Fargo, of Cravath, Swaine & Moore LLP, states that through a combination of “appropriate” governmental regulation and partnerships between the public and private sectors, and the development of standardized solutions, legal uncertainties can be clarified and the banking industry in the United States will be able to “expand its use of blockchain technology to provide more efficient and secure products and services to new and existing customers.”

Cryptoassets and blockchain are on the forefront of the minds of regulators concerned about financial stability, investor protection, and market integrity. The paper argues that banks can provide confidence and protection to customers and investors in the space. The paper includes discussion of potential applications of blockchain that the authors consider to be most significant, including blockchain-based currency, lending, and clearance and settlement systems. The paper notes that, since this new landscape lacks clarity in key legal areas, it also explores legal questions that still need to be resolved.

The paper describes how blockchain was touted as technology that could fix practically any issue in the industry, but industry interest in blockchain use cases waned when the experiments conducted on potential blockchain applications, including pilot programs conducted in the financial services and banking industry, fell short of these expectations. The authors conclude that now is the time for the financial services industry and the governmental authorities to work together in facilitating widespread adoption of blockchain technology in a safe and sound manner and with robust consumer protections.

Benefits of blockchain. Standardization of industry solutions through the use of blockchains can eliminate friction in transactions, reduce back-end costs and labor hours and increase transaction speed and security. The financial services industry will be able to expand its offerings, create new profit centers and provide new levels of service for customers. Other benefits of blockchain technology include:

• the potential to lower the costs associated with financial services, including through collaboration between financial institutions and through standardized processes across the industry;

• providing broader and more uniform access to otherwise financially excluded individuals; and

• enabling collaboration between financial institutions and strengthening the banking industry’s role as a trusted intermediary by creating trust between third-party entities and facilitating information transfer through means that did not previously exist.

Blockchain-Based Currency. As the market capitalization and institutional support for cryptoassets grows, banks that develop the infrastructure for cryptoasset banking services (including custody, payment processing and lending offerings) will be well positioned to serve customers participating in this new and exciting asset class. However, the authors note that the inherent difficulty and novelty of holding cryptoassets will likely solicit greater interest in having a trusted intermediary provide custody services. The paper also discussed decentralized (such as bitcoin) and centralized cryptoassets (such as stablecoins).

Legal considerations. With regard to legal considerations, the authors state that financial institutions will need to work to ensure they are compliant with a rapidly evolving regulatory landscape and will need to build the necessary infrastructure to manage their public and private blockchain-based assets, services and activities.

As other countries are promoting and developing blockchain use cases, especially in the financial services industry, the authors stressed that “private entities in the United States must continue to explore the benefits of blockchain technology and deploy it in practical marketplace solutions, and should be allowed to do so under a clearly delineated regulatory framework that does not preclude the advancement of this new technology.”

Attorneys: David L. Portilla, David J. Kappos, Minh Van Ngo, Sasha Rosenthal-Larrea, John D. Buretta, and Christopher K. Fargo (Cravath, Swaine & Moore LLP).

IndustryNews: BankingOperations Blockchain ChecksElectronicTransfers FinancialIntermediaries FinancialStability FinTech