What impact do you think DLT will have in areas such as
banks’ settlement systems? Blockchain could make settlement a
real-time phenomenon, driving down costs, counterparty risks and
barriers to obtaining capital. It might also hit banks’ fees,
which means that they will need alternative sources of income.
What’s your take on this?
In theory, DLT could introduce the benefits you reference. The clearance and settlement process could be speeded up considerably, and reduce complexity, reduce the need for reconciliations, increase transparency and increase data resilience. I agree that it might lead to banks looking for different sources of income to replace lost fees.
However, there are still several hurdles to overcome before these systems can become more widespread. The main issue is ensuring scalability and interoperability with current systems, and a regulatory/legal framework will also be needed.
As discussed in our call, a lot of people still have very
sketchy ideas about what blockchain and cryptocurrencies are, and
what they are good for. Is this still very much a niche and, in
your view, unlikely to really go mainstream?
The increasing exposure to cryptocurrencies on corporate balance sheets (e.g. Tesla and MicroStrategy), and increased exposure in the media indicates to me that this is a growing niche, and one which could become mainstream.
However we are not there yet, and it may take central banks using the technology (through what are being touted as ‘Central Bank Digital Currencies’) to make that leap.
Where might cryptocurrencies most likely find a
successful home – emerging markets where currencies are often
worthless and unreliable? Do you see much traction in more
developed economies? Will rising inflation encourage people to
hold the stuff?
While cryptocurrencies can be volatile, they pale in comparison with some currencies. In Venezuela hyperinflation has led people to use crypto, for example to send remittances and mitigate against inflation eating away at wages.
El Salvador has adopted bitcoin as legal tender and, again, remittances are at the heart of this. A significant part of the country’s GDP arises through remittances, and the costs of sending these funds are therefore highly relevant.
In more developed economies I can see cryptocurrencies being held as a hedge against rising inflation. However, the way that many people hold crypto is more like a commodity (some would say ‘digital gold’) than a traditional ‘fiat’ currency.
There’s a patchwork of different regulations around the
world. Where is the most liberal place in your view and where is
the most restrictive? What do you think might happen to the
regulatory landscape in the next five years?
In general, smaller nimbler jurisdictions have taken the lead by introducing specific DLT legislation. Gibraltar is one example (we have Ince colleagues based there who specialise in the area), as is Malta. Certain states in the US are particularly DLT friendly, for example Wyoming.
On the other end of the scale, China is very restrictive (but is using DLT for its own digital yuan), and a number of northern African countries (Egypt, Morocco, Algeria and Tunisia) have banned cryptocurrency.
There will be increased regulation introduced in developed countries, including the UK, and it will be interesting to see what level of consumer protection may be brought in for cryptocurrencies. I also consider that larger countries will be closely watching regimes introduced by smaller jurisdictions.
The Law Society recently released its second edition of a comprehensive report entitled Blockchain: Legal and Regulatory Guidance, and I consider that English and Welsh law could become a legal foundation for DLT in the coming years.
What do you make of the remark that blockchain is a
solution in search of a problem? Does it provide real benefits or
is it just another way of connecting people?
Blockchain has been touted as the solution to numerous problems, and that might be the issue.
I do not see it as an answer to all ills, but do believe that it provides real benefits in certain scenarios, particularly where there is a need to build trusted relationships and provide verification of information.
Edward Chapman. In addition to his corporate and commercial work, Chapman, based in Bristol, has a specialism in emerging and disruptive technologies, and is a blockchain thought leader who has spoken internationally on the topic. This followed a secondment working with sector experts at Anderson Kill in New York. The Ince Group has offices in nine countries across Europe, Asia and the Middle East and has more than 700 people.