Off The Chain! A Guide to Blockchain Derivatives Markets and the Implications on Systemic Risk

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Abstract

Blockchains are publicly viewable and theoretically unalterable records of bitcoin transactions. They are thus crucial to the functionality of cryptocurrencies. Through the blockchain, bitcoin algorithmically decentralizes the maintenance of the transaction ledger and delegates the task to users on its network.

Blockchain technology shows promise beyond cryptocurrency: banking and financial institutions have established partnerships with fintech firms to explore the applicability of blockchains in capital markets. Blockchains, used in conjunction with self-executing smartcontracts, present particularly compelling opportunities in derivatives markets, which are typically beset by numerous intermediaries. The blockchain could radically reinvent the existing market infrastructure. Certain intermediaries like central counterparties could become redundant or see abbreviated functionality. If this happens, the current body of derivatives laws and regulations would need to be amended to reflect these changes.

This Note examines the blockchain’s functionality and its applicability to derivatives markets. It discusses the current state of derivatives regulation, including the mandatory clearing mandate imposed by Title VII of Dodd-Frank. This Note argues that the current regulatory scheme is underpinned by a need to reduce the systemic risks posed by derivatives and that the new regulatory blueprint for blockchain derivatives markets should consequently be motivated by a reduction of the systemic risks inherent in the technology itself.

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Fordham Journal of Corporate & Financial Law