Fortune: Blockchain could have saved Lehman Brothers

Rage Comment : To this day, Lehman's sudden bankruptcy remains an unsolved mystery. However, compared with the cause of Lehman's bankruptcy, today's experts are more concerned about how to prevent such financial events from happening again. The emerging blockchain technology brings new directions for exploration of this issue. J. Christopher Giancarlo, a member of the US CFTC, believes that if the technology had been available in the era of Lehman, regulators could use ledger technology to track the development of enterprises and prevent crises early. However, there is still a lot of controversy about this. It's just that financial institutions still choose to explore this field, and perhaps they can find its potential benefits.

Translation: Annie Xu

Blockchain technology could have saved Lehman Brothers? Well, you could say that.

If bitcoin’s blockchain technology had been available in 2008 and adopted by Lehman Brothers, the investment bank collapse that triggered the financial crisis would not have occurred, Commodity Futures Trading Commission Commissioner J. Christopher Giancarlo said on Tuesday.

J. Christopher Giancarlo

Giancarlo said that if blockchain technology, the digital accounting protocol that supports bitcoin transactions and is now being tested for other trading applications, had been used earlier, it would have been clear to regulators that Lehman Brothers' financial activities were entering extremely vulnerable areas.

"Had there been an accurate blockchain record of Lehman Brothers' transactions in 2008, corporate prudential regulators could have used data mining tools, smart contracts and other analytical applications to identify corporate anomalies. This would have allowed regulators to respond more quickly to Lehman's credit deterioration."

Therefore, Giancarlo said that regulators should not interfere with banks’ blockchain-related application testing. He compared blockchain technology to the development of the Internet and called for the same do no harm regulatory policy for blockchain technology, just as the government’s decree on the development of the Internet more than 20 years ago.

Implementing a do-no-harm policy requires many regulators, such as the FDIC, CFPB and FinCEN, to work together to develop a simple guidance framework that banks can follow without worrying about changing regulatory policies. Reportedly, banks such as JPMorgan Chase have already begun testing blockchain technology.

However, it’s not clear whether blockchain is a silver bullet for the financial crisis, and some even derided Giancarlo’s comments as crazy.

Bert Ely

Bert Ely, head of financial institutions and monetary policy consulting firm Ely & Company, countered:

"Once an economic crisis occurs, markets tighten and trading activity stops. Once rumors of Lehman's solvency spread, parties to the contract were no longer willing to execute transactions. Blockchain cannot solve this problem."

He believes that it is wishful thinking to expect the government to adopt blockchain technology, and cross-institutional cooperation is not the strong point of regulators.

"These agencies are bureaucratic fiefdoms, they are jealous of each other, they have turf wars, they can't work well together; even if they try, their views and philosophies are fundamentally different."

However, the financial industry is still interested in blockchain technology and will slowly conduct various experiments before regulatory policies are finally decided.

The aforementioned DTCC, whose owners include a group of banks, hedge funds and other financial intermediaries, only provides a database for the transaction records between owners. On Wednesday, it announced a cooperation plan with blockchain startup Digital Asset Holdings to track repurchase agreements between bank members. The head of Digital Asset Holdings is former JPMorgan Chase banker Blythe Masters, and the company's investors include JPMorgan Chase, CME Group and the recently joined ASX (Australian Securities Exchange), Australia's largest exchange operator.