Blockchain, the peer-to-peer distributed ledger technology introduced in 2008 to support Bitcoin, has lately attracted attention for its potential uses in areas unrelated to the virtual currency. A recent Harvard Business Review article predicted that blockchain has the potential to "slash the cost of transactions and reshape the economy," and to become "the system of record for all transactions".
In essence, blockchain is a bookkeeping method, which can be public (like Bitcoin) or private. Among its key innovations as a distributed ledger are the "chains" between entries which are distributed among multiple network users, making those entries difficult to alter. Unlike a conventional or "centralized" ledger, in which a single authority serves as the "trusted third party", in a blockchain each network user has its own verified copy of the distributed ledger and can immediately see the transaction on the ledger.
Any public or private system that has historically relied on a centralized ledger to verify transactions is susceptible to innovation from blockchain. Consider, for example, securities clearing, payment processing, derivatives, title registries and supply chain management. To date, much of this innovation has come in the private sector. A recent New York Times article, for example, highlighted how IBM has used blockchain to track complex cargo shipments for Walmart and Maersk.
There is vast opportunity for blockchain-based innovation in regulation. Governments are already studying how blockchain could change how they monitor and regulate high-volume transactions. The Bank of Canada launched a joint initiative with Payments Canada and R3, a consortium of banks, to study how blockchain could improve the Large Value Transfer System, and the Bank of Canada has announced that it is planning further trials.
Although there has been no formal proposal to this effect yet in Canada, it is tempting to imagine how blockchain-based regulatory technology could one day be used to improve secured lending. A blockchain-based personal property security registry could protect against some of the most litigated aspects of secured lending, for example, by identifying which assets are subject to security. Lenders could take comfort that their collateral has not been "double pledged" or "double sold" to others, and automatically be alerted if the asset becomes subject to other security. A blockchain-based registry of debtors could protect against spelling mistakes in debtor names that under the present system can challenge a registration. The list could go on.
Of course, existing regulatory models such as our personal property security registries were developed over years and it is difficult to imagine them being replaced with blockchain-based models in the very near future. However, blockchain has quickly demonstrated itself to be a transformative technology. It is only a matter of time before we see proposals to incorporate blockchain into the regulation of secured lending, and it is worth considering now what that innovation should look like.