Blockchain, or Distributed Ledger Technology, is a complex technology that is still very much in its infancy. But as adoption grows, regulators, central banks and other participants in Financial Services need to develop a sound understanding of the risks and business model implications associated with this technology. In this article we explore what governance means for blockchain in Financial Services, why it's important, and what challenges are facing those looking to implement effective frameworks.

The vision of Distributed Ledger Technology is more efficient markets. The active experimentation with its application across the Financial Services industry can be attributed to the promise that blockchain offers many benefits over traditional technologies: lower costs; faster execution; greater resilience and transparency.

However blockchain isn't a mature technology. There are still many questions about how best to implement it: Private Networks; Public Networks or Hybrid versions? What kinds of governance structures will work best for different types of networks, organisations or services. 

The market and technology are both continuing to evolve and it’s important for decision makers to stay informed as the strategic decisions organisations face in adoption are rapidly changing.

Governance is not a new concept to financial services, however as the adoption of Ledger technology starts to transform business models, the market participants and regulators need to ensure that appropriate rules and regulations are in place across the industry, jurisdictionally and internationally.

It's important for legal, regulatory and governance frameworks to develop in parallel with the technology. In an environment without clear rules it becomes very difficult for industry participants and developers to know where they stand, legally. A lack of clear guidelines leaves processes open to interpretation - which isn't always a good thing, whilst proscriptive rule may inhibit innovation and investment. A balanced collaborative approach is needed for the development of legal frameworks, new protocols and the creation of standards.

Governments, regulators, and central banks will continue to play an important role in the evolution of the global financial system. As ledger technology evolves to meet compliance and business expectations, the role of governance will be crucial to its success. The challenges faced by traditional financial services are different from those for blockchain; for example, there is no single entity responsible for managing data on blockchains as there is with traditional databases operated by banks or other institutions.

Governance models must be put into place early so that they can evolve as new technologies evolve over time - meaning we need to start thinking about how this should happen now, rather than later!

The decentralised nature of ledger technology makes regulation more challenging than it was in the past. The lack of a central authority such as a government or entity to regulate it changes the nature of oversight and how regulators need to think about accountabilities. The emerging network for financial services has multiple stakeholders with different incentives and objectives who must work together to create consensus on how to manage the network. This process requires significant time and effort from all parties involved: regulators must understand how these ledgers and the evolving business models work before they can draft appropriate legislation; developers need access to legal guidance so they can build compliant applications; users need clarity on what constitutes illegal activity on blockchains (for example, some cryptocurrencies have been used for money laundering). The use of Regulatory Sandboxes and Pilot Regimes are important to provide the industry safe harbours to develop the required understanding of required changes to legislation and the knock on implications of adoption.

It is not just the rule book that requires rethinking.  Distributed ledger governance is a complex problem especially as the ecosystem and networks develop and interconnect. Addressing Governance is not simply a technical issue; it's also an economic one. The “tokenomics” of transactions are key elements in network design, introducing concepts such as, Governance tokens, Validator tokens and Smart Contracts.  While governance and validation can be performed with one token, the splitting tokens along functionality lines is seen as an approach to separate scale of holding(stake) from network governance.  

The challenges facing industry adoption of blockchain cannot be solved by one organisation alone. These challenges are not just technical, they also involve social and political issues. This means Distributed Ledger Governance will require a delicate balance between stakeholders, regulators and other users to manage decisions about how to operate the network, who has input into those decisions, and how they will be implemented. Regulators will need to recognise the this network governance differs from traditional corporate governance in two key ways: it's decentralised rather than centralised; 2) it has no single point of failure or accountability because there isn't one person or group who has control over everything else happening on the network

The Decentralised Networks of the future will require a new approach to governance that the Financial Services Industry, Regulators and Central Banks need to start shaping today.

Conclusion

The future of Financial Services Infrastructure in Distributed Ledger Technology, However the road forward still contains many blind corners. Realising the vision will require a new type of global regulatory framework to guarantee the market stability, resilience and integrity. The challenges faced by blockchain cannot be solved by one organisation alone; instead, we need an approach that involves multiple stakeholders working together towards a common goal.