Blockchain technology as a potential risk source and a risk mitigator: US reflections and outlook

Abstract

Cryptocurrency, its risks, its volatility, and recent collapses of crypto-related firms have been splashed across the news for years. It is therefore unsurprising that recent developments surrounding disruption in the US banking system have thrust cryptocurrency into the spotlight again, with conventional financial analysts debating the degree to which blockchain-related institutions and products may have contributed to recent bank runs and instability. In the meantime, many US regulators have tended to focus on the potential downsides and risks of blockchain technology, and have recently increased the intensity of their enforcement activities against crypto market participants, often premised on decades-old legislation and case law. In the context of these broad trends, an underexplored idea is that greater integration of blockchain technology into the mainstream financial system could actually reduce bank run risk. If that is right, certain US regulators should modulate their approach and devote further resources to fostering a healthy adoption of blockchain technology within the financial system. Against that backdrop, this paper explores the potential capacity of blockchain technology to curtail widespread risk in the financial system, suggests that blockchain technology indeed has significant power to act as a risk mitigant, offers some practical observations as to how blockchain adoption could improve the risk profile of financial systems, and concludes that the promise of blockchain technology in this regard should spur US regulators to foster and promote the growth of blockchain.