Regulation is a major obstacle to blockchain technology

The World Economic Forum recently released a report showing that blockchain has the potential to transform financial infrastructure. Blockchain is the essence of the decentralized digital currency Bitcoin, and this technology can completely change the traditional financial model.

The Forum’s latest report looks at projects that are disrupting the financial services industry. It draws on more than 12 months of research, interviews and participation in multi-stakeholder workshops to understand the views of more than 200 industry leaders and subject matter experts on the technology.

According to the report titled “Opportunities and Obstacles: Blockchain and the Future of Financial Infrastructure,” the development of blockchain technology necessitates understanding its positive and negative impacts as the technology transcends current models of financial intermediation.

The World Economic Forum’s analysis is based on six key findings about the impact of distributed ledger technology (DLT) on the future of financial services:

DLT has great potential to improve efficiency and optimization by establishing new financial services infrastructure and processes.

However, DLT is not a panacea; rather, it is just one of many technologies that is seen as forming the basis of the next generation of financial services infrastructure in the future.

The applications of DLT will vary depending on the use case, and leveraging the technology from different perspectives can yield a variety of benefits.

Digital identity is an important enabler for expanding adoption into new industries, and digital fiat currency, along with other emerging capabilities, has the power to amplify benefits.

The most impactful DLT applications will require deep collaboration between incumbents, innovators, and regulators, increasing complexity and implementation delays.

New financial services infrastructure based on DLT will redraw processes and question the orthodoxies that shape today’s business models.

The World Economic Forum report explores these key findings in depth based on an in-depth analysis of use cases across financial services, which helped them outline a comprehensive approach to thinking about blockchain and distributed technologies at the business process level within every financial service.

Jesse McWaters, Head of Disruptive Innovation in Financial Services at the World Economic Forum, said:

“The financial services infrastructure will be radically transformed by blockchain technology. It will redraw processes and call into question the fundamental policies underlying existing business models. Our research focuses on the future state of blockchain technology.”

Several financial services reports have assessed the potential of blockchain technology. Global payments, insurance, deposits and lending, financing, investment management and market reserve extraction are among the use cases highlighted in the reports.

The report mentioned that one of the most notable beneficiaries will be global correspondent banks. By implementing DLT, banks can gain many benefits and improve the efficiency of the value chain, while also completing the next generation of competitive services for local banks. Settlement and servicing activities can also be executed through smart contracts, which can cut expensive fees and reduce operating costs.

The adoption of blockchain technology could be driven by key IT providers who integrate DLT into their core banking platforms and who are likely to play a key role in setting standards.

DLT can reduce manual errors and the resources required in the execution process by executing smart contracts and settling cash and stocks simultaneously, which is one of the considerations that financial institutions are interested in.

On the downside, the report mentions design errors in the new technology, which raises concerns because of code problems, while the expanded use of digital currencies has facilitated crime, illegal activities and potential vulnerabilities.

Of course, a common theme of discussion is regulation, and the report outlines the implementation of blockchain technology in various industries. For example, in the payment industry, there needs to be a standardized KYC (know your customer) process to create a legally binding relationship between cryptographic hashes and value exchanges. In addition, if the legal and regulatory framework is to be rewritten, the advantages of blockchain technology in the fields of trade finance and insurance need to be proven.

The advent of blockchain makes it difficult to implement KYC information disclosure. In addition, due to the lack of legal precedents for smart contracts, regulators will find it difficult to determine the process of using such contracts.

Blockchain seems certain to change the structure and back-end management of the financial environment. In addition to providing banks with new and improved services, blockchain technology can also allow home buyers to pay less.

However, this new technology brings challenges, and regulatory differences may hinder the development and implementation of blockchain.