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P2.T10.20.1. The impact of blockchain technology on finance

Nicole Seaman

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Learning objectives: Describe the challenges blockchain technology faces in gaining widespread adoption in economic applications. Explain and assess the questions to be considered prior to implementing a blockchain solution to any economic activity. Explain the concept of cost of trust when speaking about legacy financial systems and blockchain technology. Describe the current regulatory concerns surrounding crypto-finance and assess the steps taken by regulators to address these issues.


20.1.1. According to the International Center for Monetary and Banking Studies ("The Impact of Blockchain Technology on Finance: A Catalyst for Change" by Casey, Crane, Gensler, Johnson, and Narula), a blockchain is defined by three characteristics: a shared (and decentralized) ledger, a chain of ledger entries that links an entire transaction history, and digitally signed transactions/instructions. The elements of a blockchain system include the consensus protocol, the append-only log, and an auditable database. Each of the following is true about blockchain technology EXCEPT which is false?

a. Smart contracts do not require a trusted third party (e.g., a trustee or escrow agent) to intermediate between the contracting counterparties
b. Different blockchains can be viewed on a spectrum of decentralization where, for example, Ethereum is slightly less centralized than Bitcoin (even as both are permissionless)
c. As an analogy to the internet stack of open protocols (Ethernet, TCP/IP, HTTP), blockchain technology offers the potential for an internet of value stack that will enable new applications
d. A blockchain technology is Byzantine Fault Tolerant (BFT) if it does not fail simply because the packet holding the transaction takes a meandering or serpentine route to reach its destination

20.1.2. In regard to the advantages and challenges of blockchain technology, which of the following statements is TRUE?

a. In comparison to the Visa network, Blockchain has better performance, is more scalable, more efficient, and consumes less energy
b. A hard fork is the deadline (e.g., midnight on March 31st) for participants in the blockchain system to update their client software with the latest patch fix
c. Blockchain tends to reduce the cost of trust by enabling value transfer between counterparties without requiring third parties, but this benefit is often outweighed by its high operational and social coordination costs
d. Blockchain's append-only transaction log is an elegant and simultaneous solution to both law enforcement's penchant for surveillance and the typical financial institution's need to protect the privacy of customer data

20.1.3. According to the authors of “The Impact of Blockchain Technology on Finance: A Catalyst for Change” by the International Center for Monetary and Banking Studies, each of the following is TRUE about the current or potential application(s) of blockchain technology EXCEPT which statement is false?

a. Distributed ledger technology (DLT) is likely to enable know-your-customer (KYC) bureaus who can reduce the massive duplication in KYC checks
b. Initial coin offerings (ICOs) have a high success rate due to their operation under investor protection frameworks and their ability to reduce storage costs relative to gold coins
c. Blockchain has a strong use case in cross-border payments, which are historically slow and expensive due to intermediaries and reliance on Nostro/Vostro accounts
d. Zero-knowledge proofs attempt to provide a solution that reconciles the inherent tension between a need for individuals' privacy and the need for regulators to be able to detect illicit activity

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