VoxEU Column Financial Markets Financial Regulation and Banking Frontiers of economic research

The blockchain catalyst for change

The idea of a new software system that powers a consensus-driven form of shared record keeping has already had a profound effect, encouraging rapid and substantial investment in what is now commonly referred to as blockchain technology. This column introduces the latest Geneva Report on the World Economy, which assesses the available evidence and likely impact for this technology across a wide range of applications and explores the potential use cases for the financial sector, and the ways in which the organisation of these activities may change over time.

There could not have been a more propitiously timed release than that of Satoshi Nakamoto’s nine-page paper entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System” (Nakamoto 2008). It landed on 31 October 2008, in the wake of Lehman Brothers’ collapse and with a global financial crisis in full force. Yet at the time it went more or less unnoticed in mainstream financial circles, preoccupied as they were with preventing the existing system from collapse. 

Now, a decade later, it’s clear that Satoshi’s contribution to finance must be taken seriously: a new software system that powers a consensus-driven form of shared record keeping – enabling the digital transfer of value in a decentralised manner.  (Satoshi Nakamoto is a pseudonym and the identity of the author or authors remains unclear; people generally refer to this contribution by the fictitious first name.)

Download the 21st Geneva Report on the World Economy, The Impact of Blockchain Technology on Finance: A Catalyst for Change, here.

Listen to Simon Johnson, one of the authors, discuss the report in a Vox Talk here.

In a sense, Satoshi’s contribution was not entirely new – the ‘distributed consensus’ problem Satoshi was proposing to solve is well-known.  This is the question of how multiple, independently run computers can reliably agree on a set of common data in the presence of faults, i.e. where there is a risk that one or more computers are intentionally or unintentionally programmed to introduce false information.

In another sense, Bitcoin is a major breakthrough because participants are incentivised to select and validate transactions made in its native currency, bitcoin. Through that process, participants can agree upon a continually updated history of those transactions – without the need to trust third party intermediaries.  

Users control their bitcoin via a digital signature system by which they indicate consent to transfer coins. These digital signatures are public, cannot be forged, and can be verified by anyone.  It is important that there is only one version of the transaction ledger because in order to verify a payment, participants look at the ledger to validate that an amount of bitcoin has indeed been transferred. If there were different ledger histories, a malicious user might be able to ‘double spend’, i.e. transfer a single bitcoin more than once, as two payments.

This simple and straightforward idea – and associated software code – has already had a profound effect, encouraging rapid and substantial investment in what is now commonly referred to as blockchain technology.  A blockchain is a consensus protocol used to create an append-only log (in the case of Bitcoin, a transaction ledger) that can then be used to form an auditable database (in Bitcoin, a record of who owns which coins). This database is constructed by multiple, possibly distrusting participants and is secured using cryptography so that every entry can be audited and verified.

The result is a common, consensus-based record of transactions that is updated in real-time, one with broad potential applications, including for non-currency exchanges of value and data. In theory, such a system could end the need for costly, time-consuming reconciliation across separate, centralized ledgers run by multiple entities. It could also enable new forms of economic activity that were previously impossible in the absence of reliable, intermediating record-keepers.

We believe this technology could reduce the ingrained ‘cost of trust’ that currently adds friction to commerce and enriches trust-intermediating gatekeepers across the economy.  Blockchain developers agree. They are conceiving of a host of new potential uses: for cross-border payments, in clearing and settlement for financial transactions, for supply-chain management, for device-to-device transactions in the Internet of Things, to create more reliable property and asset registries, to forge portable digital identities, and to improve record-sharing in sensitive areas such as health care. 

However, even after nearly a decade, much remains unclear about precisely what form or forms of blockchains will prevail.  On the decentralised end are already functioning systems like Bitcoin and Ethereum, which are permissionless – meaning there are no restrictions on who can join the system and participate in creating the ledger.  Currently, these open systems are constrained in their capacity to scale by a variety of technical obstacles. Innovative solutions to these problems are being pursued, with the goal of increasing transaction-processing capabilities and lowering overall computation requirements, but they are yet to be adequately proven in live environments. Traditional centralised databases avoid these constraints but rely on trusted entities. They are widely used today, and may still prevail in many areas, perhaps with some enhancements inspired by blockchain-based competitors.  In between are myriad developing – or potentially developing – permissioned blockchains, which have some degree of decentralisation without being open to all.

In the 21st Geneva Report on the World Economy, we assess the available evidence and likely impact for this technology across a wide range of applications (Casey et al. 2018). We also explore in detail the potential use cases for the financial sector, and the ways in which the organisation of these activities may change over time.

Executives who run intermediaries – in finance or anywhere else in the economy – are thinking about whether that role will prove sustainable as more decentralised forms of interaction spread.  And of course, many entrepreneurs are interested in challenging or even breaking down established forms of intermediation.

Investors are drawn to the opportunity, and for obvious reasons.  The rise of internet giants, such as Google, Facebook, and Amazon, makes the point that the spread of digital technology can rapidly create new fortunes.  

Without question, blockchain technologies have grabbed headlines – and attracted capital – in part because developers latched onto not just the decentralised nature of Bitcoin, but also the more general idea that investors can participate by buying what have become known as ‘coins’.

The full legal issues are – as with all such matters – fascinating to specialists but a little hard for non-specialists to grasp fully; our Geneva report attempts to provide an accessible guide.

Exactly how this plays out will matter, for the development of this new activity and potentially for the economy as a whole.  Over 3,000 ‘initial coin offerings’ (ICOs) have been published to date, with cumulative capital raised close to $20 billion.  (Figures 1 and 2 show the most reliable recent data, which is published by CoinDesk; two authors of the Geneva report are advisors to CoinDesk.)

Figure 1 ICO tracker tab, with circles showing amount of capital raised 

Source (reproduced as Figure 7 in Casey et al. 2018)

Figure 2 All-time cumulative ICO tracker tab


At the time of writing, the total crypto asset market was valued at approximately $250 billion, with 57% of that value in tokens other than bitcoin.  There are at least 200 crypto-exchanges operating with tens of millions of customers worldwide.

Regulators are forced to take a view in this situation (Carney 2018).  Innovation is important and it has generally bolstered economic development when countries have been supportive – as was the case with the development of the internet.  We generally get more new products, better value for consumers, and more good jobs when sensible innovation is allowed to incur.

At the same time, however, the recent wave of ICOs – and the general investing frenzy in this space – has attracted significant fraud and abuse.  One study in February of 2018 found that 59% of a sample of 2017 ICOs had already failed or semi-failed (Morris 2018).  (In the Geneva report, we unpack in some detail exactly what is known from those cases that have been investigated, for example by the Securities and Exchange Commission.)

In our assessment, for blockchain technologies to reach their potential – both in terms of applications as well as for investing – they need to be more fully brought within public policy and legal frameworks.  Clear rules of the road today will allow firms – both incumbents and start-ups – to more fully explore investing in crypto assets, token applications or other blockchain technology.  Key points include full and fair disclosure to participants in investment schemes – in particular promoting transparency – and rules against fraud and manipulation in crypto markets.  

There is also wide agreement that these new markets and technologies must not be allowed to undermine financial stability (Financial Stability Board 2018), with central banks and finance ministries currently discussing how much risk cryptocurrencies, other crypto assets, and blockchain applications might pose in that realm.  There also need to be appropriate safeguards against illicit activity – including money laundering and terrorism finance – and tax avoidance.

Market participants, the investing public, entrepreneurs, technology developers, regulators and political leaders should all play a role. In particular, organisations conducting token sales through ICOs and crypto-exchange operators should now seek to comply with the law to the fullest extent possible.  We are hopeful that there will be moves in this direction. 

It is too early to precisely forecast the impact of blockchain technology – or even whether change will come through the creation of entirely new structures or because existing intermediaries are forced to innovate.  Either way, blockchain technology has real potential as a catalyst for change in the world of finance – and much more broadly.


Carney, M (2018), “The Future of Money”, speech to the inaugural Scottish Economics Conference, 2 March. 

Casey, M, J Crane, G Gensler, S Johnson, and N Narula (2018), “The Impact of Blockchain Technology on Finance: A Catalyst for Change,” Geneva Reports on the World Economy, Number 21, ICMB and CEPR.

Morris, D Z (2018), “Nearly Half of 2017 Cryptocurrency ‘ICO’ Projects Have Already Died”, Fortune, 25 February. 

Financial Stability Board (2018), “To G20 Finance Ministers and Central Bank Governors”, 13 March. 

Nakamoto, S (2008), “Bitcoin: A Peer-to-Peer Electronic Cash System”, 31 October. 

52,913 Reads