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Financial Stability Oversight Council (FSOC), a US government organization, warned that blockchain technology and marketplace lending could present risks to financial stability in its annual report this week.
It acknowledged that both provided opportunities to lower transaction costs and improve efficiency, but that regulators would need to continue to monitor new technologies and business models to assess what risks they might pose now and in the future. FSOC outlined areas in both marketplace lending and blockchain technology where regulators should be especially vigilant. Marketplace lending. FSOC warned that marketplace loan investors could become less willing to fund loans during a trough in the business cycle, increasing the risk of the model. It also said that as the number of marketplace lenders competing with traditional lenders rises, they might lower their underwriting and loan administration standards in order to attract customers. This would likely mean riskier loans.
Blockchain technology. FSOC suggested that risks associated with blockchain may not emerge until solutions are deployed at scale, because of participants’ limited experience with the technology. If a large number of financial firms are involved when issues emerge, this could be a significant risk to financial stability. FSOC also said that some blockchain systems could be vulnerable to fraud, if a significant minority of participants colluded to defraud the rest. Additionally, it suggested that if these systems reduce the importance of existing centralized intermediaries, like clearinghouses, regulators will have to adapt accordingly.
FSOC also highlighted that financial firms using blockchain-based systems may operate over multiple regulatory jurisdictions or national boundaries. As a result, coordination between regulators would be required to identify and monitor associated risks.
This has historically been a murky area, with […]
