Treasury Dept: Co-ordinated Regulations.
Distributed Ledger Systems A distributed ledger is a transactions database which can be accessed and potentially updated by a number of parties. Under traditional, centralized ledger systems, a single trusted party is responsible for maintaining an accurate database of transactions; this “golden copy” ledger serves as a reference for all other parties. In contrast, under a distributed ledger system, each member of a group is able to maintain its own golden copy ledger, which, after allowing for some delay in the transmission and encoding of new transaction information, is guaranteed to be identical to the ledger instances maintained by all other members of the group. Distributed ledgers are made possible through the application of encryption and algorithms that allow new transactions to be aggregated, encoded, and appended to an existing chain of transactions. These features enable network participants to validate the accuracy of new transactions and prevent the history of transactions from being modified. Distributed ledger systems may enable market participants to manage many types of bilateral or multilateral transactions without the direct participation of trusted third parties. Proponents of distributed ledger technology believe it could help to significantly improve efficiency by replacing manually intensive reconciliation processes and reduce risks associated with trading, clearing, settlement, and custody services. Distributed ledger systems may mitigate risk and improve resilience in financial networks in a number of ways. Because distributed ledgers can be designed to be broadly accessible and verifiable, they could provide a valuable mechanism for enhancing market transparency. By eliminating the need for some transactions to flow through trusted third parties, distributed ledgers could reduce concentrated risk exposures to those rms and infrastructures. In addition, by improving the speed and accuracy of settlement systems, distributed ledger systems could reduce the counterparty and operational risks which arise when financial assets are exchanged. For example, distributed ledger systems may facilitate the automation of complex, multi-party transactions such as the payment of bonds and insurance coupons through the development of smart contracts. Like most new technologies, distributed ledger systems also pose certain risks and uncertainties which market participants and financial regulators will need to monitor. Market participants have limited experience working with distributed ledger systems, and it is possible that operational vulnerabilities associated with such systems may not become apparent until they are deployed at scale. For example, in recent months, Bitcoin trade confirmation delays have increased dramatically and some trade failures have occurred as the speed with which new Bitcoin transactions are submitted has exceeded the speed with which they can be added to the blockchain. Similarly, although distributed ledger systems are designed to prevent reporting errors or fraud by a single party, some systems may be vulnerable to fraud executed through collusion among a significant fraction of participants in the system. Distributed ledger systems have the potential to change the way some asset classes are traded and settled. Financial regulators have often worked with those market infrastructures and forms which facilitate trading and settlement, such as exchanges, dealers, and clearinghouses, to monitor markets and, in some cases, regulate market activity. To the extent that distributed ledger systems ultimately reduce the importance of these types of more centralized intermediaries, regulators will need to adapt to the changing market structure. Furthermore, since the set of market participants which makes use of a distributed ledger system may well span regulatory jurisdictions or national boundaries, a considerable degree of coordination among regulators may be required to effectively identify and address risks associated with distributed ledger systems. https://www.treasury.gov/initiatives/fsoc/studies-reports/Documents/FSOC%202016%20Annual%20Report.pdf