Fed Governor Advises Regulators to “Watch Out” for Blockchain

This week, US Federal Reserve Board of Governors Governor Lael Brainard made new comments on the potential impact of blockchain technology and distributed ledgers on US financial markets.

Speaking at a blockchain roundtable hosted by the Institute of International Finance (IIF), Brainard praised the emerging technology but also cautioned that the financial industry should be careful not to undermine confidence in the world’s financial markets.

Brainard further encouraged and admonished regulators who have the responsibility to maintain a balance between social and private interests.

Brainard said:

"Regulators should analyze the impact of technological developments through active and timely engagement. Focus on the potential benefits of these emerging technologies and prepare necessary regulatory adjustments while demonstrating their safety and integrity and ensuring the public interest."

In her remarks, the former Treasury Under Secretary for International Affairs said that blockchain technology experiments are becoming more frequent, and identified what she sees as the main challenges and considerations in development and large-scale deployment.

Interoperability of the distributed ledger with other versions of the technology and retention systems is “critical,” as are those with access to the database.

Brainard also concluded his remarks by noting that the Fed will continue to address technology development issues facing industry stakeholders and regulatory colleagues.

Various national and international regulators have weighed in on the technology and its applications following the presentation, with representatives from the U.S. Commodity and Futures Trading Commission (CFTC) and Japan’s Financial Services Agency (FCA) both making important announcements in recent weeks.

Reasons for optimism

Despite the warning, her remarks did not sound accusatory, and she said the financial industry and regulators should remain optimistic about the technology's potential to bring about positive change.

For example, she said we shouldn’t assume that any change to the financial system carries huge risks, noting that computerized ledgers were once “a pipe dream of technologists.”

Brainard also specifically praised the innovations in peer-to-peer (P2P) networking, data storage, cryptography, and consensus algorithms in blockchain technology.

However, she still said that technology and its applications still need to be constantly re-evaluated, and pointed out that technology itself does not have the ability to solve industry problems.

She concluded:

“A lot depends on the technology itself, its scalability, maturity level, controls, the environment around it, standardisation and accessibility of transaction data, the quality of management and governance, and the policy environment in which it is deployed.”