The Governance of Blockchain Financial Networks

Abstract

Since the emergence of the virtual currency Bitcoin in 2009, a new, internet-based way of recording entitlements and enforcing rights has increasingly captured the interest of governments and the Real economy. The technology is commonly called ‘blockchain’, which also comprises the concept of the ‘smart contract’. The global financial industry, including literally all systemically relevant institutions, is now exploring ways of using the technology in mainstream financial products and services, such as securities, payments and derivatives business. Acceptance of blockchain and smart contract technology will, however, not depend solely on its operational efficiency and reliability but also on its effective governance. No comprehensive conceptual framework has yet been developed, neither at a domestic nor at an international level. Fundamental questions include the relationship between State law and internal governance, the regulation of systemic risks and the ineffectiveness of anti-money-laundering laws. Furthermore, the new technology raises questions as regards the enforceability of rights to financial assets in the event of insolvency, and the survival of the contractual framework for risk mitigation on which the modern financial industry is built. The picture is further complicated by the fact that blockchain networks naturally encompass the idea of unrestricted, internet-wide activity, independent from jurisdictional boundaries and State regulation. This article develops a conceptual framework for the governance of blockchain-based networks in financial markets. It attempts a vision of how public and private law should limit the potential of this technology in order to protect market participants and societies at large, while at the same allowing for the necessary room for innovation.