Blockchain Technology, Digital Assets, and the Future of Finance

The rise of Bitcoin showcases the reliability of blockchain technology as a way for trusted parties to agree on the state of a transaction database without using a trusted middleman. Banks and financial markets primarily help customers agree on, record, settle, and reconcile transactions and related data. By providing a public, permissionless ledger running on a large number of computer nodes, blockchain technology could provide and facilitate financial services – like payments or securitizations – peer to peer, without the need for a bank. Ethereum, a blockchain with a built-in programming language for smart contracts and decentralized applications, even allows for the automated execution of transactions. And if an increasing amount of assets is stored in so-called tokens on blockchains, as the World Economic Forum recently predicted, a significant portion of the activity that makes up an economy and its supporting financial system could run on blockchains. In order to understand whether and when this grand vision could actually become reality and how banks and other financial service providers can prepare for it, we need to consider a few database technology and finance-related issues.