There's a lot of disruption taking place in financial services, but blockchain seems to be the topic on everyone's mind.
The potential transparency and efficiencies promised by bitcoin, Ethereum, and other cryptocurrencies have piqued the interest of most companies that process transactions.
But blockchain and cryptocurrencies also carry a significant amount of uncertainty, which is very largely tied to constantly evolving regulations. Companies don't want to commit too much money to blockchain projects until they know how they'll be treated (and taxed) by regulatory bodies.
As investors, this leaves us in an interesting position. Will blockchains be embraced by the enterprise and eventually reach ubiquity? Or will they slowly fade away and become irrelevant?
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The Regulatory Issue
To help us figure out what's happening on the blockchain regulatory front, I recently spoke with CB Insights' intelligence analyst Arieh Levi at the Future of Fintech 2018 event. Levi is an expert on blockchains; he closely follows their development and understands how and where they are proving most useful.
Here's what Levi had to say about how regulatory agencies currently view blockchains:
The SEC is taking a much harder stance on ICOs and cryptocurrencies. They recently said that ether is not a security. Bitcoin is not a security. But most other tokens -- according to the SEC and statements from Jay Clayton, who is chairman of the SEC -- look like securities. And obviously, unlicensed securities are a very big deal and very illegal. So, certainly some of the activity that's happening is related to that, such as the downward trend.
It seems much of this year's price fall in cryptocurrencies is due to the potential fear of the SEC bringing the hammer down with unfavorable regulations. That's certainly a risk that many investors -- understandably -- aren't willing to take.
Levi continued to explain that cryptocurrency regulations are still in their very early innings. But in a good way, they are also setting the ground rules for how blockchains can and will be used:
Think about bitcoin. Bitcoin is not really regulated. Nobody even knows who created it. It's sort of this anti-government, anti-establishment digital currency -- and it's unstoppable, in a lot of ways. The point at which Bitcoin is regulated, though, is the centralized exchanges, where people trade fiat for bitcoin. So that's how you can think of cryptocurrencies.
Then, moving to ICOs and cryptoassets. There are companies and teams behind those networks and tokens. So, the thing about regulatory is there is always someone you can talk to, someone you can sue who could return investors' money in many instances. That regulatory clarity is also very good. It will attract -- and is attracting -- good, smart actors who are trying to develop this space.
We'll watch for more of those smart actors to continue to develop the underlying blockchain infrastructure.
The bigger picture
With regulatory frameworks in place, Levi noted that blockchains could offer a much more efficient platform that "tokenizes" -- or creates coded versions of sensitive information that can be shared without compromising their security -- all of your digital assets:
We're seeing tokenized assets. So, imagine if you were able to tokenize your home and your Apple (AAPL +2.91%) stock, and put those on blockchains that are interoperable. You might be able to pay off your mortgage with Apple stock; no need to convert it into cash, stay fully invested. You don't have to convert to working capital, in a sense. It's a very interesting idea.
But decentralized networks still have to scale. Blockchains require a lot of work around scaling. They're not so efficient yet. So, there's certainly some room for improvement there. But it could be game-changing.
Blockchains could offer a way to conduct financial transactions much more efficiently. But we're still quite a ways out from that actually happening.
The Foolish bottom line
It's been quite a ride for Bitcoin investors this past year, which has brought several highs of euphoria and several lows of disillusionment. But behind the speculation, blockchains also have the potential to revolutionize our financial services infrastructure. With the stakes enormously high, regulators are taking a measured approach on how the should be governed.
