Risks of using bitcoin
The use of bitcoin continues to grow. Recent years have seen a strong increase in the number of transactions in this virtual currency, even though it is only used to a limited extent for the sale and purchase of goods. We maintain our warning that the use of virtual currencies still entails due risks. Banks and payment institutions that use virtual currencies face integrity risks, as purchasers and sellers cannot be identified. Banks and payment institutions should therefore take appropriate measures to ensure sound and ethical business operations if they do wish to offer services involving virtual currencies.
Blockchain has potential
As opposed to the bitcoin itself, the distributed ledger technology underlying it has great potential. Distributed ledger technology is a way of accounting for transactions and balances digitally in a network. In traditional accounting, a central party keeps a ledger, whereas with distributed ledger technology, all participants keep a common ledger in their own decentralised computers. This effectively creates a shared, decentralised ledger (a distributed ledger), allowing transactions to be conducted directly between the originator and the recipient, without intermediaries and in principle at low cost. The technology is potentially fast and always available. Possible applications for consumers and businesses include more efficient and less expensive international money transfers. The data involved are also reliable, because all transactions are decentrally verified. Distributed ledger technology allows consumers themselves to check the ownership of anything from music to diamonds to houses.
With efficiency gains in mind, many banks and other financial institutions are looking into how they can harness this technology for a variety of purposes: a uniform infrastructure and decentralised storage of data requires fewer intermediaries, processes are more streamlined and communication between market participants is easier. The appearance of this technology in the financial sector will also require central banks and supervisory authorities to adjust their approach, whether this involves them using the technology themselves, or its use by financial market operators. We are prepared for these eventualities. If a financial enterprise can demonstrate that it is able, with the help of blockchain technology, to comply with the underlying objective of ensuring sound and ethical business operations, then it can qualify for the regulatory sandbox. This allows us to as far as possible accommodate innovation that contributes to supervisory objectives.
Better financial resilience
It is possible that distributed ledger technology can increase the financial system's resilience. If all decentralised computers share all information, and collectively comprise the entire infrastructure of the system, then the loss of one or several computers can be absorbed by the remaining ones which have the correct information. This also lowers operational risks. Distributed ledger technology may also provide better resilience against cyberattacks. All systems for clearing or settlement of financial transactions between several parties must of course be protected against cyberattacks. The bar for this was recently raised, as set out in a joint publication by the central banks and securities supervisory authorities. Effective use of new technology can help meet the new standards.
DNB tests distributed ledger technology
In order to properly assess the possibilities, we are researching, analysing and testing distributed ledger technology in both a national and international context. This includes researching the potential applications of distributed ledger technology which offer the most advantages for use in the financial sector and which have characteristics that the central bank considers important. By conducting our own hands-on experiments we can obtain a better understanding about what this technology can offer and its advantages and disadvantages.
It is not yet known if and when blockchain will make its appearance in the financial sector. Much depends on the outcome of the experiments that various parties are now conducting. It is however clear that such technology can lead to innovation in the sector.