Blockchain Technology What's in Store for Canada's Economy and Financial Markets?

Abstract

Blockchain technology has the potential to transform dramatically how a modern economy deals with maintaining and updating records. This innovation has already created lots of turbulence in financial markets and beyond. It will be a challenge to let markets figure out how to best use this technology while ensuring consumer safety and efficiency. Our goal in this paper is to unveil the potential of blockchain technology and guide regulators in how to approach the challenges this technology entails. The most well-known examples of blockchains are found in the area of payments systems and, more generally, in financial markets. It is thus understandable that the financial industry is leading the charge to unearth the potential of this technology in order to find cost efficiencies, but also to recapture above normal profits. The potential application of this technology, however, reaches much further than merely being a currency like bitcoin or a record-keeping system. Early applications of this technology include smart contracts and attempts by governments to build universal online identification systems. Blockchain technology also introduces new concepts such as cryptographic communication protocols and distributed data storage that can increase the safety of electronic networks and offer potential cost efficiency. We do not expect distributed ledgers to completely supplant traditional intermediaries, especially in areas where these intermediaries are of systemic importance or provide services that require a high degree of ad hoc coordination. Still, many elements of this new technology offer a unique opportunity for such intermediaries to modernize their infrastructures and offer their clients safer and cheaper systems. It is not clear, however, how to realize such benefits in a way that makes sure they are passed on to the economy as a whole. This leads us to identify three major challenges and priorities for policymakers and regulators arising from blockchain technology: 1. Design a principle-based regulation regime that achieves high safety standards, legal certainty and a stable environment for transactions based on distributed ledger technology; 2. Ensure that this technology leads to appropriate end-user cost efficiencies rather than simply a redistribution of above-normal profits among intermediaries; and 3. Determine areas where government involvement is advisable, be it in the role of facilitator for a private or public distributed ledger, or as a direct central node that applies elements of the technology but retains the monopoly of managing the ledger entries.