The most daring central bank blockchain experiment: The Netherlands wants to reshape financial market infrastructure

The Dutch central bank is preparing an ambitious experiment to see whether entire financial markets could be built on a blockchain system.

While many applications of blockchain, called smart contracts, can be replicated using existing technology, Ron Berndsen, who leads a series of blockchain experiments at the Dutch central bank, said the distributed nature of blockchain could lead to a complete reshaping of financial market infrastructure, making them more difficult to hack.

Like the Bitcoin network itself, these experiments envision the inner workings of a financial market infrastructure, which could be distributed among participating nodes. To compromise this financial market infrastructure, an attacker would need to gain access to more than half of the network’s computing power.

The experiments, scheduled to begin later this year, come as hackers increasingly target financial market infrastructure, with the head of the Bank for International Settlements (BIS) earlier this month calling for immediate action on the issue and potential solutions.

In an interview, Ron Berndsen explained that he believes blockchain could be the key to preventing further attacks on financial market infrastructure.

“If hackers compromise two or three data centers of a bank, they can bring down the financial market infrastructure,” Berndsen told reporters. “With blockchain, you can decentralize the nodes so that you don’t even know where they are.”

To understand whether financial market infrastructure could be distributed via blockchain, Berndsen referred back to earlier experiments by the Dutch central bank.

Berndsen said he recruited a group of seven people through an email invitation sent to bitcoin enthusiasts.

He started running a full node on the Bitcoin network and participated in Bitcoin mining in early 2013. He said that although he never received mining rewards, he bought some Bitcoin and other digital currencies to study their advantages and disadvantages.

Inspiration for central banks

After becoming familiar with digital currencies such as Bitcoin, Berndsen said the Dutch central bank expanded its experiments.

Last month, the Dutch central bank announced it had begun re-running a network to conduct experiments simulating Bitcoin.

“As a theoretical thing, it’s obvious that you need to test it experimentally,” said Berndsen, who has a doctorate in economics and is a professor of financial market infrastructure and systemic risk at Tilburg University in the Netherlands. Still, he said he now believes the tests are unique globally. “I think every central bank would do this,” he said. “I’ve met with a lot of central bank committees and I would expect them to do this, but so far, they haven’t.”

The Dutch Central Bank's experimental currency is called DNBcoin. Unlike Bitcoin, its initial block reward is 1 billion DNBcoin, and its block reward is halved every two minutes.

Through this experiment, they also "proved" that after the Bitcoin block rewards are distributed, the network can still continue to operate through transaction fees.

High risk

The third experiment, according to Berndsen, will target the financial market infrastructure sector in the Netherlands.

As defined in a 2012 report by the Bank for International Settlements, a financial market infrastructure is “a multilateral system of institutions, including the operators of the system, that is used for the clearing, settlement, recording of payments, securities, derivatives or other financial transactions.”

In his speech, Berndsen announced the results of the first two experiments and listed financial market infrastructure as one of the three key components of the Dutch central bank's "overall goal of financial stability."

However, this year also marks a turning point in the history of financial market infrastructures, as international hacker attacks on these infrastructures have become increasingly frequent.

In March, hackers attacked about four dozen U.S. financial institutions, including the New York Stock Exchange and Nasdaq, by infiltrating the Iranian government, Bloomberg reported.

The report came a month after hackers launched another attack on the Bangladesh central bank, prompting security expert Eugen Kapersky to predict that threats to financial markets were increasing.

Earlier this month, Benoit Coeure, Chairman of the Bank for International Settlements, published a report titled “Guidance on Cyber ​​Resistance for Financial Market Infrastructures.”

In the report, he wrote: “Financial infrastructures should immediately take the necessary steps to improve their cyber resilience in collaboration with stakeholders. Financial market infrastructures will be required to develop concrete plans to improve their cyber resilience within 12 months of the publication of this guidance.”

The most daring blockchain experiment

The Dutch central bank is understood to have considered applying blockchain to a wide range of possible solutions, including financial market infrastructure.

In addition to discussing its bitcoin blockchain experiment at the Netherlands Blockchain Conference last month, the central bank also announced last week that it plans to open a blockchain university in early September.

Berndsen said it may take several years to unlock the full potential of blockchain, but his bank will accelerate the process.

Berndsen told reporters that the Dutch central bank is currently contacting other central banks and institutions in the industry to see if they would participate in the experiment.

“We think the next prototype will require more coding work, and more thinking, and we may need more people,” Berndsens said.