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Adam Ludwin, chief executive officer at Chain, a San Francisco, Calif.-based startup that partners with businesses like Visa and Nasdaq to provide blockchain networks, explained how blockchains work and urged bankers to embrace the technology during a keynote address at the International Conference on Policy Challenges for the Financial Sector, held at the Federal Reserve in Washington, D.C., according to Bloomberg.
The event was attended by central bankers from 90 countries, including officials from the World Bank, the Bank for International Settlements, the International Monetary Fund, and Janet Yellen, chair of the Federal Reserve in the U.S.
Ludwin told listeners they should be “running toward this opportunity.”
Why Central Banks Should Act
Ludwin gave a history of bitcoin and blockchain technology, which he said has captivated Wall Street executives since it provides a way to release billions of dollars by speeding up transactions that often take days or weeks. He said the banks should issue fiat currency in digital form.
Ludwin has claimed that the entirety of financial services will become a software business since the tools exist to make this happen, according to a recent article in The International Business Times.
He told the gathering of central bankers that government plays a lead role as the backer or creator of technology at the infrastructure stage, which is where blockchain is at present.
Cyber thefts give banks a good reason to pay attention to new technologies.
Cyber Theft Poses Challenge
Thieves stole $81 million from Bangladesh’s central bank in February. An Ecuador bank claims it was robbed of $12 million last year, while criminals attempted to steal $1.1 million from a Vietnam bank that experts believe might have been a practice drill for the Bangladesh robbery.
Some of the cyber attacks utilized a messaging system operated by the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Ludwin said blockchain technology could prevent such breaches.
A banking system operating on a blockchain would be distributed with no single point of failure since the system runs simultaneously on all the computers it links to worldwide, he noted.
As he spoke, Ludwin took out his phone and sent a bitcoin donation to Wikipedia, noting that it was probably the first time a bitcoin was used from the Federal Reserve.
The question bankers face is not how digital currencies can assist the existing financial system, but the role central bankers will play. Central banks can operate digital networks themselves, issue digital assets, hold assets, develop products and services to run on the networks, or simply observe them.
Also read: The Federal Reserve bitcoin strategy
New Products Can Use Blockchain
Ludwin said the increase in leveraged credit products such as commercial paper, money market funds and repurchase agreements can transition naturally onto a blockchain.
Referring to such markets as “shadow banking,” Ludwin said that is where central banks have the least chance to direct the economy. Should banks and their customers conduct these transactions on a blockchain, central bankers will have new transparency and insight. This is due to the fact that all transactions on a blockchain are recorded and cannot be changed. The transactions can also be viewed by anyone on the network, including regulators, at any time.
Yellen, according to Ludwin, “got” his message.
A Fed spokesperson, David Skidmore, declined to comment.
Images from Shutterstock and LinkedIn.