WASHINGTON — Blockchain is coming to banking — eventually.
That was the message that Federal Reserve Gov. Lael Brainard delivered in a speech Friday afternoon to the Institute on International Finance, saying that while there is great promise for so-called distributed ledger technology, it is still in the "proof of concept" stage, meaning that markets and the public will likely have much longer to wait before it becomes commonplace.
"These proofs of concept are often simple, experimental uses of the technology on a small scale that help stakeholders understand the potential and limitations of the technology for a specific purpose, which in turn typically lead to refinements and more developed proofs of concept," Brainard said. "As such, many potential applications are in their infancy, and the industry may still be several years away from an application that is ready to be fully implemented."
Brainard noted that the potential benefits of blockchain are clear. The instantaneous nature of transactions would be a boon to the existing payments system, which has not had a significant overhaul in decades. The distributed nature of the technology would also be enormously beneficial to both markets and regulators by enhancing transparency, particularly in securities, commodities and derivatives markets. But there are significant problems that have not yet been resolved, she said.
"In concept, such technology could lead to greater transparency, reduced costs and faster settlement," Brainard said. "Nonetheless, as is frequently true in the complex arena of payments, clearing and settlement, we can also expect that practical details covering a host of technical, business and market issues will have an important role in determining how new technologies ultimately perform."
The distributed nature of the technology also opens the ledger to potential hacking and theft, she said. As blockchain becomes more commonplace in financial markets, regulators and end users need to emphasize common protocols and accepted practices to deal with inevitable breaches.
"End-point security is another critical component of any successful implementation of the technology," Brainard said. "Adverse actors that can take over a participant's access to the ledger remains a key security concern, as thefts of cryptographic keys in bitcoin continue to demonstrate."
Fed Chair Janet Yellen said during testimony to the House Financial Services Committee last month that the central bank was "not looking ourselves at implementing" blockchain. She said, however, that distributed ledger technology "could have very significant implications for the payment system and for the conduct of business." The Fed is slated to release the results of an in-depth examination of blockchain and the payments system later this year.
"I think innovation using these technologies could be extremely helpful and bring benefits to society," Yellen said. "At this point we're simply trying to understand the nature of these innovations."