Outlook for blockchain in the global financial system


Financier Worldwide Magazine

January 2019 Issue

FW moderates a discussion on the outlook for blockchain in the global financial system between Joaquín Sales, Rudolf Haas, Alix Prentice and Shawn Davis at King & Wood Mallesons.

FW: How would you describe the potential for blockchain technology to disrupt the global financial system? To what extent could its functions, features and underlying principles prove revolutionary?

Davis: When people talk about blockchain, the terms ‘immutable’ and ‘impervious’ are often used; and this appears to the uninitiated to be abstract. The structure of blockchain and its constancy means that it is believed by most that it is not possible to make alterations to the underlying data after they have been registered in a distributed database. This results from a key facet of blockchain: decentralisation. In other words, individual network components that address transaction authenticity are not connected within a communal server and are thus viewed as being both independent and autonomous. As an example, each Bitcoin block is verified by more than 10,000 nodes. Data protection in the blockchain is afforded through an access key created by the author. Wherever alterations are made to the block, the prior access key is neutralised and this is communicated to all of the users of the network who may, by majority action, stop any further unauthorised activities. This, in turn, disallows changes to the information registered in the blocks. These features are a completely new approach to verifying and safely storing data. This is what makes the technology disruptive; blockchain is increasingly being used as a more secure medium to transfer money via the decentralised technology and to secure banking records more efficiently. For very similar reasons, another area potentially ripe for blockchain disruption is real estate, where the technology could be used to streamline the process of escrow.

Sales: Avoiding intermediaries could be the most disruptive power of blockchain technology. It can be used by financial services organisations in any transaction which involves the storage of data requiring third-party verification. Since blockchain technology is able to prove the existence of a document at a specific time, it could potentially replace intermediaries such as notaries. Blockchain simplifies and reduces costs stemming from cross-border financial transactions. For example, in 2017, Banco Bilbao Vizcaya Argentaria (BBVA), implemented a Bitcoin-based system that made 50 transfers between Mexico and Spain in a few seconds, whereas usually each movement of funds would take up to four days. Therefore, international payments can be made faster and cheaper – approximately 80 percent cheaper according to BBVA. Blockchain technology can also be used with smart contracts which are automatically enforceable. This makes it possible to obtain a program that will always act the same way without requiring the goodwill of a third party or interpretation of any kind. In an era with strict and tight legal requirements, a reliable system to speed up the closing of transactions may have a significant impact on the financial industry.

Prentice: As a relatively new and advancing technology, distributed ledger technologies (DLTs) and blockchain is also finding its way into many uses and applications in sectors other than finance – for example insurance, health, education and capital markets services. The core principles of the technology mean that the potential for blockchain and its reach is endless. Blockchain simplifies and reduces costs stemming from cross-border financial transactions. In September 2016, Ornua – formerly the Irish Dairy Board – completed the world’s first global trade/letter of credit transaction with Seychelles Trading Company, on a new platform developed by Israeli FinTech start-up Wave using blockchain, following a collaboration involving Barclays Bank Ireland. The new platform helped cut the parties’ costs, reduce the risk of fraud and condensed a process that typically would have taken seven to 10 days into less than four hours. The smart contracts on a blockchain, which execute automatically, will transfer title to goods and money, remove the need for banks to provide documents such as letters of credit, which drastically cuts out the middlemen and their fees, and create a trusted network of assured authority concerning the origin of the goods and products being supplied. In 2017, seven of Europe’s biggest banks, including KCB, HSBC, Deutsche Bank and UniCredit, stepped up their attempts to shift trade finance onto blockchain by hiring IBM to create a platform to facilitate small business cross-border trade finance orders. By way of another example, British music artist Imogen Heap pioneered the distribution of digital payments for her music through a blockchain platform using smart contracts.

Haas: The impact on intermediaries and also certain types of infrastructure in the financial industry will be the most significant, at least in the next few years. If you think of the process behind payments, or certain aspects of securities trading or clearing of derivative trades, there seems to be quite a bit of room for improvements in efficiency. That is even more pronounced if the transaction crosses borders. There are a number of intermediate steps in payments and transfers that distributed ledger technology will allow us to skip in the future – or, if not skip, automate. The service providers along the way of these transfers will have to prove again how and why they are adding value in the process. Not all of them will be able to do that. I think smart contracts will need a few more years to have a real impact. I am also less optimistic in terms of the self-executing properties. The higher the level of sophistication of these contracts, the more potential for interpretation. After all – why should lawyers be able to do with code, what we have not been able to accomplish with language; namely, create a document that has all the answers? I am not even sure that is desirable. That being said, in areas where contracts are mostly about sequencing steps in a logistically complex transaction, rather than allocating risks for unforeseen scenarios, smart contracts will rapidly gain in importance.

Emirates NBD successfully went live in April 2018 with ‘Cheque Chain’, which is underpinned by blockchain technology and focuses on reducing cheque-related fraud.
— Shawn Davis

FW: How would you characterise the ways in which financial services companies – across banking, capital markets, asset management and insurance, for example – are experimenting with blockchain projects? What gains are being made in terms of efficiency, transparency and security?

Sales: Although at a very early stage, financial institutions in Spain have already carried out several projects using this technology. In April 2018, BBVA became the first global bank to use blockchain technology to execute a €75m bilateral financing transaction. Blockchain technology was used in the whole process, from the beginning of the negotiations to the execution of the documentation. In November 2018, BBVA has taken a step further by closing a €150m syndicated financing transaction. Like in the previous one, the whole facility’s negotiation process was closed using the blockchain network, making the whole process faster and ensuring the tracking of the documentation and transparency. Some of the most relevant banks in Spain, such as Bankia and CaixaBank, among others, have launched a consortium in order to improve Know Your Customer (KYC) proceedings so that clients can be identified easier and faster, which is a general concern for all financial entities. Banco Santander has recently experimented with a project involving blockchain technology to exchange funds among financing entities. The technology is similar to the one used in Bitcoin. UBS, BNY Mellon and Deutsche Bank are some of the other banks involved in this project, which aims to save costs of around €20bn.

Haas: In Germany, I think all banks are looking at this very intensely but are approaching it very carefully. Much of the focus is on improving internal processes, but this year has brought the first couple of customer-facing transactions. Commerzbank used blockchain technology in a foreign exchange transaction with Thyssen Krupp, and even in a commercial paper issue that was done in parallel using blockchain and conventional means. Unicredit has completed its first trade finance deals on the platform ‘’ which it developed with other banks. These transactions certainly signal a breakthrough, but if you look at the news in the financial community relating to the use of blockchain technology, I would say there are still more announcements of banks joining a certain platform or signing up to a certain protocol than releases about transactions actually executed on these platforms or using these protocols. However, I think that will change quickly in the coming months. Banks and insurers are significant venture investors in the FinTech area and want to make sure they have access to the winning new technologies and put them to use. They are handpicking the customers and transactions for first application now, and then they will roll out the technology more broadly.

Prentice: In early 2018, the Bank of England published a report regarding its recent proof-of-concept (POC) with firms operating in DLTs or blockchain, for example Baton Systems, Clearmatics Technologies lTD, R3 and Token. This report concluded that DLTs are not yet sufficiently mature to provide the core for the next generation of real-time gross settlement (RTGS) service and therefore the Bank of England sought to explore and understand the feasibility of connecting blockchain firms to its renewed RTGS in order to support settlement in systems operating on innovative payment technologies, such as DLTs, and facilitate payment infrastructures in accessing the central bank. According to Mark Carney, the Bank of England Governor, renewed RTGS is expected to play an important role in opening access to central bank money and the Bank of England is continuing to explore the demand for introducing synchronised settlement to the renewed RTGS service. In the UK, experimenting has gone beyond the banking sector. In the insurance sector, fraudulent claims, fragmented data sources and slow manual processes, together with legacy underwriting models, are some of the biggest challenges facing the industry. Blockchain offers control, transparency and traceability for each claim, and could eventually lead to automatic payouts. Blockchain can also be used to record the origin and ownerships of ships, cars, homes and other assets, helping to reduce fraudulent claims and improve risk modelling for the insurance sector. Munich, AXA, Allianz, Zurich and Aegon, among many other insurers, have already launched the Blockchain Insurance Industry Initiative, known as B3i, to explore the potential of using DLTs within the insurance and reinsurance industry for the benefit of all stakeholders in the value chain, including end customers. As the platform would provide an overview of all markets, regulators have an opportunity to become aware of systemic risks enabling appropriate action at the policy level. Recently, Maersk, the world’s biggest shipping line, teamed up with IBM to launch a new blockchain platform to facilitate the digitalisation of the supply-chain process by tracking shipments around the world. It announced that the cost of global trade is estimated at US$1.8 trillion annually with potential savings from more efficient processes of around 10 percent. The new platform is intended to reduce global trade barriers and increase efficiency across international supply chains, bringing to market a trade platform for containerised shipping which connects the entire supply chain ecosystem. In September 2017, Maersk completed a 20-week trial of marine insurance based on blockchain and partnered with EY, Microsoft and several insurance companies to try to securely share shipping data on a blockchain. IBM started the above collaboration with a view to connecting ports, terminals, customs authorities, shipping lines and inland transportation, and so on. Since the collaboration started, multiple parties have piloted the platform including Tetra Pak, Port Houston, the Customs Administration of the Netherlands, US Customers and Border Protection and DuPont. To date, General Motors, Procter and Gamble, Walmart, Singapore Customers, Nestle, Unilever and Peruvian Customs have all expressed an interest in IBM’s blockchain capabilities and are exploring ways to use the platform across other industries, including food safety, food tracking and global trading, in order to, similarly to the finance and insurance industry, bring more efficiency, transparency and control to such industries.

Davis: In the UAE, Dubai’s largest bank, Emirates NBD, picked a different area to apply the technology. It successfully went live in April 2018 with ‘Cheque Chain’, which is underpinned by blockchain technology and focuses on reducing cheque-related fraud. It involves various security-enhancing technologies to bolster cheque authenticity. This is achieved through a quick response code printed on each page of new cheque books. The code records every cheque on the bank’s blockchain to help ensure that following cheque receipt and clearance, bank employees are able to validate cheque authenticity and have source access at any time. On 26 November 2018, Abu Dhabi’s Al Hilal Bank completed the world’s first sukuk issuance using blockchain technology. This involved using the technology to sell and settle within secondary markets, a small portion of a US$500m five-year sukuk issued in September. This is an early example of how blockchain is being integrated into bank infrastructure and how it is expected to streamline issuance and trading.

FW: How might blockchain address certain financial system inefficiencies and loopholes, such as the growing complexities of distribution, disparate regulations covering international transactions and delays in sharing transaction details?

Sales: Blockchain technology can be used to simplify processes and reduce the time needed to execute transactions. In 2017, the Spanish Stock Exchange Authority (Comisión Nacional del Mercado de Valores (CNMV)), along with a group of financial institutions integrated by, among others, Banco Santander, BBVA, BNP Paribas, CaixaBank, Commerzbank and Société Générale, have worked together in a project named Fast Track Listing (FTL), which uses blockchain technology to register issuances of securities. FTL successfully tested registration of an issuance of warrants. This trial proved that it is possible to carry out the issuance process in 48 hours as opposed to an average time of more than a week. This was possible thanks to the interconnection of the systems, the automatic validation of requirements and transparency for all parties involved. Inefficiencies within the current stock market system were already addressed in the United States. In May 2017, Citigroup and Nasdaq announced the launch of a new tool to enable payments through blockchain technology. Spain may follow a similar pattern. Also, as regards issues stemming from delays in recording and reconciling stock exchange transactions, it should be noted that blockchain technology solves them by continuously tracking the transaction in all of the ledgers. Third parties or intermediaries may no longer be needed.

Haas: I think distributed ledger technology can add the most value where transactions require a frequent exchange of information or where certain occurrences trigger subsequent steps to be taken by parties who are not themselves in a position to confirm the event that needs to occur first. The former is the reason why syndicated lending has caught the attention of IT developers, and the latter why international trade finance is an area where people are looking at blockchain-based solutions. In both areas, the nature of the transactions allows for significant efficiency gains. These efficiency gains, in my view, are the key drivers for this technology. Regulatory loopholes, or disparate regulation, will not be significant drivers of development in the longer term. While that is a factor in structuring initial coin offerings (ICOs), these are a niche phenomenon. The market for commercial-use is in servicing traditional players, meaning regulated financial institutions, integrating blockchain technology into their service offering. To the extent they contract with independent third-party providers for this, these providers will legitimately find locations where regulators do not make it difficult for them to operate, but whatever they do, still needs to be done in a way that works for regulated entities as the direct contractual parties. In the end, much of the financial industry is built on trust, and no technology changes that.

Prentice: The current system used by banks of a single, centralised ledger requires each participant to synchronise their systems used to track and manage the life cycles of their financial transactions, through a process known as reconciliation, which involves teams of people in each bank checking with their counterparts in other banks to make sure everything matches. A common solution to this is through the use of a decentralised ledger, whereby participants each share the single, centralised ledger. But centralised utilities are also expensive and their data and processing must be integrated with each participant’s own systems. Distributed ledgers synchronise thousands of computers in a distributed network via the internet. If one’s computer were to acknowledge that its user was the owner of a certain amount of, say, Bitcoins, then each other computer in the network must also do so. Applying this to banking, all the banks’ systems would be able to synchronise without requiring an extensive workforce to reconcile and resolve the issues which are present in the current system.

Davis: The Society for Worldwide Interbank Financial Telecommunication (SWIFT) describes itself as “the global provider of secure financial messaging services”. SWIFT provides messaging, standards and services to connect banks to their counterparties globally to transact securely, reduces costs and risks in securities and foreign exchange transactions, and provides enhanced security for corporates. The SWIFT interbank messaging platform has been exploited in certain respects to perpetrate fraud, and this has resulted in delays in or cancellation of numerous transactions. Consequently, many experts have called for implementation of end-to-end processes via blockchain using multiple simultaneous authentication points to seek to address this risk. With respect to disparity in regulations, I do not see blockchain being front and centre in addressing those. It may help connect disparate data; however, it seems to me unlikely that it will assist in delving into the nuances of regulations in order to assist with comparative analysis or harmonisation.

In the insurance sector, blockchain offers control, transparency and traceability for each claim, and could eventually lead to automatic payouts.
— Alix Prentice

FW: Conversely, what risks could widespread adoption of blockchain technology present?

Sales: Risks of adoption of blockchain technology would include issues related to security, volatility, automatic enforcement of agreements, deregulation and its potential use in illicit activities. Blockchain technology has proved vulnerable to hacker attacks. As an example, in 2016, US$50m was stolen from Ethereum users by a hacker who took advantage of a programming defect. Special attention should be placed on security breaches related to cryptocurrencies because it is the area where blockchain technology has experienced the greatest deployment and is used by millions of people. Furthermore, there is a risk related to recognition of blockchain technology as proof in a Spanish court, because it has not been accepted so far. By contrast, in July 2018, a Chinese court considered that the registration of information in the chain of blocks offers a timestamp that is admissible as evidence in court in a case concerning copyright protection, understanding that the characteristics of the technology allow an unalterable registration from a specific moment in time. The automatic enforcement of smart contracts can be a risk too. In cases of financial entities in situations of distress, articles 64 and 70 of the Spanish Law on Resolution of Credit Entities (Ley de Resolución de Entidades de Crédito) establishes that the resolution authority is able to decide which of the agreements executed by the relevant credit entity should be enforced or not. An uncontrolled enforcement of agreements, like smart contracts, in these situations would not be acceptable, as it would create a risk of a distressed situation spiralling out of control, which is precisely what this Spanish legislation – following Directive 2014/59/EU of the European Parliament and of the Council dated 15 May 2014 – seeks to avoid. In line with the above, it is not clear how a clawback action, regulated under article 71 of the Spanish Insolvency Law – by virtue of which any detrimental transaction to the assets of an insolvent company carried out within two years prior to the date of the declaration of bankruptcy may be retroactively cancelled – would work when a smart contract has been automatically enforced or, for that matter, how the successive transactions in a blockchain would be affected following such retroactive voidance of a specific transaction. Another risk arises out of the lack of KYC processes when people use blockchain technology to execute transactions in cryptocurrencies. This technology could ease the movement of funds stemming from illegal activities such as money laundering, drug trafficking or terrorism, among others. In this regard, the Spanish Tax Authorities launched a campaign of tax audits aimed at users of cryptocurrencies in 2017. Also, regarding cryptocurrencies, there is a significant volatility risk. The value of Bitcoin through 2018 has dropped over 50 percent. As a result, the trading volume in the digital currency field also decreased, along with global acceptance of the cryptocurrency. In addition, the Spanish Stock Exchange Authority and the Spanish Central Bank (Bancco de España) have issued a notice stating that cryptocurrencies and ICOs, as well as the various players involved in commercialisation of these assets, are not regulated or verified by any supervisory body in Spain. This implies that an investor in cryptocurrencies will not be able to benefit from the guarantees linked to regulated financial products.

Haas: The biggest risks, in my view, at least from a legal perspective, lie in the fact that we have no experience of how the ‘rights’, ‘claims’ or ‘assets’ created and dispersed by distributed ledger technology will be treated in insolvency scenarios. Are they just contractual claims, or in rem assets? Can smart contracts be terminated by an administrator, or amended? Can a blockchain transaction become subject to approvals from a court or creditors’ committee? Which rules will apply, when the blockchain cannot even be allocated to one computer server but is spread across many so that we cannot use that as a basis to determine jurisdiction? If you are a nerd and an insolvency specialist, these may be tons of fun to contemplate. How much fun parties to the transactions will have is, however, another matter. One risk is that a resolution spirals out of control, because there is a self-execution of smart contracts at odds with applicable laws, or to which applicable laws put a stop, or both, which may have potential knock-on effects to other parts of the blockchain, different from situation to situation. So there may be links in blockchains that courts will want to rewrite. I do not think that is something that Satoshi Nakamoto envisioned as part of his concept. Another risk I see, particularly if the technology is applied in retail markets, is that certain transactions will be done simply because people are fascinated by the technology, and lose sight of the underlying transaction. A bad deal will always remain a bad deal, even if put into the smartest of smart contracts. That is why the retail market is not ready for a broad application of distributed ledger technology, in my view. If there is some kind of scandal around consumers losing money in a transaction done using blockchain technology, it could slow down the application of the technology even in areas where it would create significant efficiency gains, because banks need the acceptance of their customers.

Prentice: Though blockchain is highly secure, no system is invulnerable. Currently, blockchain is only regulated or partially regulated in a few jurisdictions, including Gibraltar, the US, Japan, Malta, Singapore and Switzerland. Financial regulators in the UK have a well-earned reputation for an open and progressive approach to cutting-edge technology, with the FCA operating ‘Project Innovate’ and a regulatory sandbox, as well as the Bank of England’s FinTech Accelerator. However, there is still no firm regulatory framework in place for blockchain. The FCA has stated in the past that whether an ICO falls under its regulatory reach will be decided on a case-by-case basis. And, of course, derivatives that reference coins or tokens, such as contracts for difference (CFDs), are regulated as MiFID securities. However, a recent report by the Cryptoassets Taskforce – made up of the FCA, HM Treasury and the Bank of England – explored the impact of cryptoassets and DLT on financial services, and has stimulated a more directional stance. The FCA is proposing ‘strong and speedy action’, including a consultation by year-end on the regulatory perimeter as it relates to crypto assets, and on the prohibition of the sale to retail consumers of derivatives referencing certain types of cryptoassets such as exchange tokens. In the UK, some key legal questions which blockchain raises include jurisdictional and applicable law issues. Where servers are decentralised and spread around the world, a question is raised as to where a failure or breach actually occurred – and subsequently, what cross-border action is appropriate to take. Additionally, what is the legal status of the decentralised autonomous organisations being used to operate through? Where the entity is self-governing software facilitating or engaging in commerce, what legal status is attached to such entity? The legal enforceability of smart contracts is a question being raised in both the UK and Spain. The term ‘contract’ creates an impression that there is offer and acceptance, consideration and certainty. This is unlikely in most coded programs.

Davis: Blockchains that are permissionless present potential issues related to privacy, especially in light of the General Data Protection Regulation (GDPR) which came into force in May 2018. GDPR requires that users be permitted to control their personal data, and includes penalties if this is prevented. This creates a conundrum because public blockchains are designed to be immutable, and it is difficult to reconcile how an individual’s right to control their data stored in the blockchain melds with the unalterable nature of data on the blockchain. The issue of ensuring blockchain complies with GDPR requirements has been recently and preliminarily addressed by the European Union and French privacy authority, which has resulted in various recommendations, including reducing the likelihood of collusive attacks by determining a minimum number of miners, but also raises many questions.

FW: To date, how would you describe the general approach to regulating blockchain around the world? What attitudes are regulators demonstrating when it comes to supporting or restraining blockchain adoption?

Sales: The Spanish regulator is being very cautious when it comes to putting legislation in place related to blockchain technology. For the moment, it seems that no regulation will be brought forward, and instead there will be a reliance on case-by-case solutions arising from court interpretations. Despite this lack of specific regulation on blockchain technology, Spain has followed the path indicated by the European Union Justice Court, in the matter C-264/14, where Bitcoin has been considered a virtual currency with bi-directional flow and a payment method. As regards smart contracts, Spanish doctrine seems to agree that they are just agreements entered into using a different support mechanism. Therefore, since they are not a new category of agreement, no specific regulation is needed. Adjusting blockchain to data protection would be one of the most important challenges – in particular, the right to have records deleted from the internet in certain circumstances. In this sense, the European Union has shown a strong desire to be strict on data privacy, the GDPR being the best example to date. This will affect blockchain technology, as it does not sit well with its key concepts of immutability and decentralisation. Responsibility will lie with blockchain companies to ensure that they meet the regulations in place. According to the Spanish Stock Exchange Authority, certain ICOs can be considered financial instruments. In those cases, it is likely that the entities involved are carrying out a regulated investment activity, and are obliged to comply with applicable legislation on certain European directives, for example, mainly the Prospectus Directive, MiFID, the Alternative Investment Fund Managers Directive, and the Fourth Anti-Money Laundering Directive.

Haas: The German regulator, BaFin, looks very carefully at the underlying transaction, not at the technology used to execute it. The question of how to classify Bitcoin does not answer the question of how to classify any other crypto ‘asset’ using distributed ledger technology. Blockchain is a technology, not an asset class. The regulation has to be driven by what the technology is used for. It is no secret that regulators are wary of this technology being applied in a retail context – and, to their credit, most financial institutions are equally reluctant. In areas where a reliable application of the technology has been proven, I think BaFin is open to it.

Prentice: In August 2008, the European Parliament adopted a non-legislative resolution on DLTs and blockchain, which called on the Commission to assess and develop a European legal framework to solve any jurisdictional problems that may arise in the event of fraudulent or criminal cases of blockchain or DLT exchange. In the UK, the Cryptoassets Taskforce looked at financial crime risk inherent in the use of cryptoassets, and has undertaken to give one of the most comprehensive responses to their illicit use by going further than the Fifth EU Money Laundering Directive and broadening the scope of anti-money laundering and counterterrorism financing regulation.

Davis: Earlier this year, the UAE government published the Emirates Blockchain Strategy 2021, which involved transforming 50 percent of government transactions to blockchain technology by 2021. The UAE government expects savings of US$3.7bn in document and transaction processing costs, US$108m in savings from reduced document printing and a reduction of 77 million work hours annually. In general, UAE regulators are, therefore, very supportive of blockchain technology.

A bad deal will always remain a bad deal, even if put into the smartest of smart contracts.
— Rudolf Haas

FW: With blockchain expected to have a significant impact on the global financial system by 2020, what advice would you offer to financial services firms in terms of exploring and utilising the technology? What regulatory considerations should they make when doing so?

Sales: Our advice would be to adapt to blockchain technology in a progressive way. Based on the advantages of blockchain, embracing this technology appears necessary. However, as there are still significant matters to be addressed in order for this technology to become widespread, its implementation will not be imminent. Banks, unlike start-ups, have large and expensive legacy computer systems which can slow down innovation. No traditional Spanish financial entity has torn down its legacy system and built a new one. As this process is expensive and time consuming, most financial entities are replacing them with more agile technologies little by little. Therefore, updating the software used by financial institutions is another point that suggests blockchain will not be widely adopted in a short period of time. On the other hand, there are some financial processes, such as order-to-cash, procure-to-pay integration as well as the accounting consolidation between companies that are already using blockchain technology, and firms could embrace them now.

Haas: Blockchain technology offers great answers to some questions, but it cannot be the solution to all issues. So, my advice would be to identify carefully where to apply the technology and then really push for a broad use in those areas. The other word of caution I would want to add is that, if a process becomes more efficient, it can be easy to stop appreciating the intrinsic value of the steps in that process. If blockchain technology makes it easier to obtain and transmit a certain confirmation, that does not detract from the significance of why that confirmation is needed and from the importance of that confirmation being correct. We still need to understand why a seven-step process from agreement to payment has these exact seven steps, rather than four, or nine.

Prentice: Different nations have different approaches to their regulation of cryptocurrencies. For instance, China banned all ICOs in 2017. A federal judge in the US ruled that cryptocurrencies are commodities. Japan approved self-regulation of its cryptocurrency industry. The UK currently does not regulate cryptocurrencies but appears to be moving in the direction of more extensive regulation. The sensible, though possibly unexciting, advice would be to pay close attention to the spectrum of regulatory attitudes, and notice shifts, both subtle and unsubtle.

Davis: It is not essential to be the ‘first mover’, however it is important to think of specific-use cases for blockchain that will be accretive to the growth of the company and will help enhance return on investment. Any investment by financial services firms in blockchain technology should present a tangible financial benefit to them, though not necessarily in the short term. There are multiple ways to be exposed to blockchain and firms should consider whether they want to be innovative and ahead of the curve by developing products, purchasing over-the-counter products with proven track records, investing in blockchain companies or gaining some other form of exposure. A good example of a blockchain play in finance is Mizuho Financial Group’s €75m corporate loan utilising Hyperledger Fabric and Ethereum. From a regulatory perspective, privacy and GDPR are among the important matters that should be carefully considered.

The Spanish regulator is being very cautious when it comes to putting legislation in place related to blockchain technology.
— Joaquín Sales

FW: With the financial services industry processing trillions of dollars daily, what, in your opinion, is the outlook for blockchain across the global financial system – and as part of our daily lives – in the years ahead?

Sales: Without prejudice to its transversal effect in the global financial system, blockchain will grow, in our opinion, faster in relation to payment services, securities trading and foreign commerce than in other fields. Financial institutions in Spain are starting to offer their clients the possibility of carrying out international transfers using blockchain technology. Banco Santander already has its own payment system in place and other entities are following suit. Regarding securities, further to the issuance of warrants, we would like to stress the importance of tokens, which are units of value created by an organisation, and, in particular, their tradability. The Spanish Stock Exchange Authority issued a communication in February 2018 stating that tokens could be regarded as a tradable security as long as the buyer could expect the revalorisation and profitability of the securities acquired based on the evolution of the business. Finally, blockchain has a significant impact on foreign trade by reducing costs stemming from the logistics of international transactions, such as paperwork and shipping costs. A recent study from the United Nations Economic Commission for Asia and the Pacific said that revenues stemming from exports could increase annually by US$257bn worldwide.

Haas: Financial services is one industry where blockchain technology seems to find a lot of potential applications. It is not the only one, of course. I think the technology is here to stay and will soon be the pre-eminent technology solution in certain areas. Because the financial industry is heavily regulated, in some areas the legal regimes need to catch up with the technology before it can be applied, and that will likely take some time – I do not see Germany, for example, moving particularly fast here. Finally, there will be other areas, which will end up being largely unaffected by blockchain technology. Predicting which areas will be most and least influenced by distributed ledger technology is extremely hard. I think we are in for a number of surprises along the way.

Prentice: The Bank of England has explored opportunities with a number of partners. For example, it recently teamed up with a FinTech Accelerator to work with innovative firms and new technologies. PwC and the Bank of England completed a study on the current capability of DLTs and concluded that while the technology is still relatively immature, it could provide benefits in the future and also be complementary to existing systems by, for example, considerably increasing resilience. Additionally, the Bank of England partnered with US-based blockchain start up Ripple, to test an interledger system designed to synchronise different payments in different simulated RTGSs using interledger protocol. The test proved successful at processing cross-border payments between two RTGS systems simultaneously. A number of token offerings to date have involved an entity incorporated in the UK. Though this revolutionary way of trading has become popular in the UK, there are concerns about what would happen in the event that a token is lost – due to fraud or a hack, for example – and whether a claim would be enforceable. Likewise, recent communication from the FCA indicated that it is considering prohibiting the sale of derivatives based on cryptocurrency, to mitigate the risks involved in the crypto asset market. The FCA stated that it needed more time to consider how regulation can meaningfully address the risks posed by exchanged tokens, such as Bitcoin, and that it intends to go further that the Fifth EU Anti-Money Laundering Directive by implementing “one of the most comprehensive responses globally to the use of crypto assets for illicit activities”. The Bank of England is keen to gain further experience in this area and explore a number of closely associated areas, for example security, scalability, privacy and sustainability.

Davis: I think the outlook for blockchain across the global financial system is robust. There are many potential use cases for blockchain in securing and making more efficient cross-border payments, real estate transactions, share trading, smart contracts and online identity management, to name a few. The Emirates Blockchain Strategy 2021 will help strengthen the use of blockchain in the UAE by ensuring digital security of documents and transactions, accelerated decision making and reduced operational costs.


Joaquín Sales is partner at King & Wood Mallesons in Spain. He advises banks, financial institutions and funds, as well as corporations, on all kinds of financing transactions – project finance, acquisition finance, corporate and asset finance – as well as on structured finance transactions and securitisation deals, both domestic and international. He provides guidance to commercial banks, multilateral banks, funds and corporations in the energy, infrastructure and capital markets sectors. He can be contacted on +34 91 426 00 50 or by email:

Rudolf Haas is a partner at King & Wood Mallesons in Germany. He advises on securities issues and other financings, both debt (including high-yield) and equity, as well as public M&A transactions. His clients are issuers, bidders, underwriters and financial advisers. In recent years, Mr Haas has advised, among others, the Republic of Kazakhstan on sovereign debt issues as well as Qingdao Haier on its debut IPO in the CEINEX D-Share Market in Frankfurt. He can be contacted on +49 69 505029 318 or by email:

Alix Prentice is a partner in the London office of King & Wood Mallesons. She specialises in advising on the regulation of banks, financial and asset managers. Ms Prentice has over 18 years of experience (some gained at the regulator) of advising on regulatory requirements across a range of industries and asset classes, including advising family offices and private investors, hedge and other alternative fund managers, private equity, banks, broker-dealers, custodians, distributors and issuers. She can be contacted on +44 (0)20 7550 1611 or by email:

Partner at the UAE office of King & Wood Mallesons, Shawn Davis is a project finance and corporate lawyer. He has extensive experience drafting and negotiating a broad array of energy, construction and corporate/commercial agreements. He is recognised in the Chambers Global (2015-2018) rankings for projects & energy Middle East-wide and Iraq general business law (experts based abroad) and in The Legal 500 Europe, Middle East & Africa (EMEA) rankings. He can be contacted on +971 4313 1746 or by email:

© Financier Worldwide


Joaquín Sales

Rudolf Haas

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