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Blockchain in the Financial Markets – Efficiency,
Regulation, and Old Wine in New Bottles
Charles K. Whitehead
Consumers
Borrowers
Suppliers
Depositors
Bank
Financial Intermediation
Consumers
Borrowers
Suppliers
Depositors
Bank
Financial Intermediation
• Accumulate and transfer capital at lower cost
• e.g., deposits, insurance policies (asset transformation)
• Manage risk-bearing
• e.g., delegated monitoring, pooling
Consumers
Borrowers
Suppliers
Depositors
Bank
Financial Intermediation
• Costs of Intermediation
• Informational Asymmetry and Agency Problems
• e.g., depositors/policyholders vs. shareholders
• Systemic Risk
• e.g., bank run
Consumers
Borrowers
Suppliers
Depositors
Bank
Financial Intermediation
Consumers
Borrowers
Suppliers
Depositors
Bank
Financial Intermediation
Borrowers Finance
Company MMF
CP
Investors
Lower
Costs
Traditional Intermediation
Capital Markets
Financial Intermediation
Lower
Costs
Regulated Intermediaries
Unregulated/Less
Regulated Entities
Blockchain
A blockchain is an internet-based, shared, distributed ledger of transactions that are verified by participants, sometimes called “nodes,” through an internet network.
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Blockchain
A blockchain is an internet-based, shared, distributed ledger of transactions that are verified by participants, sometimes
called “nodes,” through an internet network.
• Consensus mechanism (among thousands of decentralized nodes) means that decisions can be created,
implemented, and evaluated without the need for a central authority/intermediary.
• The use of hash algorithms and the consensus mechanism make it practically impossible to alter blockchain data
after a block has been validated.
• Blockchain transactions rely on cryptographic technology to protect the security of sensitive data; in addition, a
blockchain can be public, private, or some combination (e.g., only some admitted, but the information is
transparent, or anyone is admitted, but some information is private).
Plus
• “Smart contracts” – software programs that execute certain transactions/decisions; perhaps subject to specified
events or preconditions.
Consumers
Borrowers
Suppliers
Depositors
Bank
Financial Intermediation
Borrowers Finance
Company MMF
CP
Investors
Lower
Costs
Consumers
Borrowers
Suppliers
Depositors
Bank
Financial Disintermediation
Borrowers Finance
Company MMF
CP
Investors
Borrowers Investors
Lower
Costs
Financial Disintermediation
B2B2C Intermediation
B2B2C Intermediation
$
$
$
B2B2C Disintermediation
$
$
$
B2B2C Disintermediation
$
$
$
Consumers
Issuers
Suppliers
Investors
Gatekeepers
Accessing the Capital Markets
Consumers
Issuers
Suppliers
Investors
Gatekeepers
Accessing the Capital Markets
Underwriters
Lawyers
Auditors
Other Experts
Consumers
Issuers
Suppliers
Investors
Gatekeepers
Accessing the Capital Markets
Underwriters
Lawyers
Auditors
Other Experts
$ $ $ $
Consumers
Issuers
Suppliers
Investors
Gatekeepers
Accessing the Capital Markets
Underwriters
Lawyers
Auditors
Other Experts
$ $
Consumers
Issuers
Suppliers
Investors
Gatekeepers
Accessing the Capital Markets
Other Experts
Auditors
General Public
Lawyers
Issuers Investors
“The Wisdom of Crowds”
Blockchain in the Financial Markets – Efficiency,
Regulation, and Old Wine in New Bottles
Charles K. Whitehead