How financial sector stands to gain from blockchain systems

Bitcoin. cryptocurrencies have received praise and condemnation in equal measure. file photo | nmg
Bitcoin. cryptocurrencies have received praise and condemnation in equal measure. file photo | nmg 

There has been a debate on the potential of blockchain in the financial services sector, noting the various forms of this technology may have in transforming the way the industry operates.

Blockchain (also known as Distributed Ledger Technology — DLT) is a digital system that allows continuous updating and sharing of groups of data (blocks), which are linked by computers and secured using cryptography (writing using codes).

The activity on the original ledger acts as the basis on which, transactions and reports are generated, then shared on the network of participating computers (nodes).

One application of DLT is in the creation of cryptocurrencies, which are digital currencies that use encryption techniques to guide the generation of units of currency and verify the transfer of the created virtual currencies.

Although some central banks have begun to consider issuance of their own cryptocurrencies to date all digital currencies operate independent of a central bank, for example, bitcoin litecoin, ethereum and zcash, among others. Bitcoin was invented by Satoshi Nakamoto in 2008.

While blockchain and digital currencies have some relationship, cryptocurrencies have received praise and condemnation in equal measure, dependent on perspectives held.

However, the debate around blockchain and its alternative uses has, however, been less controversial, with most jurisdictions embracing the potential benefits promised by the innovation.

The decentralised nature of blockchain has a number of benefits including better document security as the (unalterable and encrypted) ledger is shared by multiple computers, transparency as all transactions are publicly recorded and lower risk of data loss and data manipulation, given that there is no single point of failure or central party with unilateral control of the data.

In capital markets, the applications of blockchain include post-trade processing, payment and settlement of transactions, issuance, ownership and transfer of financial instruments in real time through securities trading, easing access and assessment of information for regulatory purposes through blockchain-enabled regulatory reporting, smart contracts.

Recognising the myriad opportunities to improve the efficiency, order and transparency of the capital markets to encourage Fintech innovation, the Capital Markets Authority has therefore taken strides to create a regulatory regime to guide the establishment of a regulatory sandbox – a safe space within which potential innovators can test their innovations before they are introduced to the wider market once they meet minimum standards and success thresholds.

To this end, the authority held a consultative forum on fintech and regulatory sandbox with industry players in mid-2017 to discuss the way forward.

The recent creation of a task force that will explore the use of DLT and Artificial Intelligence for development in Kenya is a welcome signal from the government.

It is hoped that as they consult widely, including with the financial sector stakeholders, a comprehensive policy on new technologies will be introduced for the better adoption of these new technologies to facilitate a more competitive and efficient Kenya, in line with Vision 2030.

Justus Agoti is Senior officer market development, Capital Markets Authority.