Boston Fed paper explores 'supervisory nodes' on blockchain networks

Boston Fed paper explores 'supervisory nodes' on blockchain networks

If blockchain technology become a major part of the financial service scene, regulators may have to start putting "supervisory nodes" on networks in order to properly monitor the industry and prevent future economic crises, says a Federal Reserve Bank of Boston paper.

Blockchain technology gained prominence because of its use in support of Bitcoin, with much of its appeal centred on the ability to operate as a 'Wild West' outside of the existing financial system, notes Jim Cunha, SVP treasury and financial services at the Boston Fed.

But, a decade on, with practically every major financial institution in the world exploring how they can tap the blockchain, things have changed.

Cunha argues that "auditors, payments network rule-enforcers, and data reporting entities wouldn’t be able to do their jobs without a view into the network traffic. And regulators might gain from a real-time view into those transactions, to understand what’s happening and better prevent problems with the organisations and industries they monitor."

While the Fed is not yet experimenting with supervisory nodes to keep an eye on what happens on blockchain networks, it is beginning a discussion with a new whitepaper.

"We can’t alter the underlying fabric on which critical assets move without watching it for risks to the system or to individual banks related to technical problems, market weaknesses, liquidity problems, etc," says Cunha.

These nodes could have business functions beyond regulators' roles but for the Fed they could, if combined with AI and machine learning, provide real-time insights into institutions and broader markets.

Pushing the benefits, Cunha quotes CFTC chair J Christopher Giancarlo, who told the Senate Banking Committee in 2018: "What a difference it would have made on the eve of the financial crisis in 2008 if regulators had access to the real-time trading ledgers of large Wall Street banks, rather than trying to assemble piecemeal data to recreate complex, individual trading portfolios."

Read the full paper:

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Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 02 May, 2019, 15:57Be the first to give this comment the thumbs up 0 likes

Regulators had full access to transactions on exchanges, still could not prevent "front running" and other shady practices of algo trading in realtime. Why? Going by Michael Lewis's "Flash Boys", that was because algo trading operates in millisecond whereas regulators monitor transactions only once a second. So algo traders would get away by squaring off a transaction within a second, thus staying out of the radar of the regulator. Shows that mere access to data won't achieve much. I suspect the same in the context of Blockchain as well.