Moody’s Report: Blockchain Disruption of Finance Markets Poses Systemic Risk
Mainstream financial institutions are increasingly adopting blockchain technology within their organization, according to a recent report from Moody’s. The Credit Ratings Agency, however, believes that the onboarding of decentralized technology protocols by these institutions could have profound ramifications for the global finance industry.
Blockchain Can Disrupt the Global Financial Process
In the report titled “Blockchain Improves Operational Efficiency for Securitizations, Amid New Risks” the agency talked about the increased adoption of distributed ledger technology (DLT) by financial institutions.
According to the report, distributed ledger technology is becoming an ever more attractive proposition to financial institutions. This trend is despite their collective aversion to cryptocurrencies.
Banks and other financial institutions are examining ways to use the technology in the securitization process. The idea is to simplify and improve the efficiency of securities trading using blockchain technology protocols.
However, researchers at Moody’s say the marriage of DLT and mainstream finance could open up significant counterparty risks.
Frank Cerveny, a senior analyst at Moody’s, said:
“New key transaction parties will be introduced to the process, namely the entities that serve as developer, provider, and operator of a blockchain. They may be either closely linked or identical with the originator, or independent third-party service providers, which could lead to a certain degree of counterparty concentration risk.”
The warning issued by Moody’s echoes similar concerns shared by numerous stakeholders in the global finance ecosystem. Christine Lagarde, Managing Director of the International Monetary Fund (IMF) believes that blockchain technology is shaking the financial system.
More Risk Factors Associated with Private Blockchains
According to Cerveny, blockchain technology cannot function as a one-stop-shop for financial institutions. Instead, firms will have to dedicate considerable resources into developing monitoring and control systems for the DLT implementations.
With the widespread adoption of blockchain technology, however, comes notable risks. Furthermore, with the comparisons made between private and public blockchains, the report notes that private blockchains pose even more threats.
With banks and other mainstream finance organizations tending towards private blockchains, critics say permissioned DLT platforms have little chance of success. As previously reported by BTCManager, both Bill Barhydt of Abra and Matt Hougan of Bitwise Asset Management believe that private blockchains are doomed to fail.