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Blockchain 06 Sep 2018

Blockchain vs. cryptoassets: different worlds

Blockchain is one of the most disruptive new technologies in the world of finance. But currently its use in the sector is focused mainly on the underlying technology – Distributed Ledger Technology (DLT)- to create applications or redesign processes rather than in creating cryptoassets. The reason? Blockchain applications have the potential to improve the efficiency, transparency and traceability of processes while cryptoassets are volatile.

This is how José Manuel González-Páramo, Executive Member of the Board, Head of Global Economics, Regulation and Public Affairs at BBVA, explained things at the Eurofi financial forum held this week in Vienna. González-Páramo was a member of a discussion panel that included Austrian Finance Minister Harald Waiglein, MEP, Jakob von Weizsäcker and Denis Beau, deputy governor of the Bank of France.

The sector is following two main lines of development for blockchain-based applications.  The first is related to the transformation of already existing processes, particularly those that are slow and involve multiple interactions. Generally, in these cases blockchain technology is used in private, collaborative circles that have seen the emergence of initiatives such as R3 and Enterprise Ethereum Alliance, of which BBVA forms part. Some of the applications that have sprung up from this are used in business segments such as cross-border payments and syndicated loans.

This is the line BBVA has most explored with the launch of global pioneering pilots such as the first corporate loan based on blockchain with Indra, the first line of credit operation with Repsol and the first electronic presentation of documents in an international trade deal between Europe and Latin America.

The second line of development focuses on market decentralization and the tokenization of assets. José Manuel González-Páramo has pointed out that this is an area for exploration but so far cryptoassets have not brought clear benefits to end-users. These are mostly speculative products with high price volatility. The BBVA executive noted that some crypto-tokens have been created with the idea of becoming an alternative digital currency but so far none of them satisfies the required functions of money.

González-Páramo pointed out that so-called utility tokens, which provide certain rights to holders of them, have as yet limited real applications for financial institutions. He believes that crypto-tokens could be of interest as a means of financing for new companies in the form of Initial Coin Offerings (ICOs). Even then, he warned of the risks that accompany this new form of financing used mainly by startups which offer tokens (whether they be rights to use a future service, property or assets) in exchange for cryptocurrencies.

In short, while the benefits of the first are enormous, there are doubts about the use of cryptoassets, the lack of consumer-protection protocols and risks related to money-laundering, with more questions raised than solutions provided.

José Manuel González-Páramo, consejero ejecutivo responsable de economía, regulación y relaciones institucionales de BBVA

The challenges for regulators

The BBVA executive director underlined the work carried out by the public authorities that monitor and warn about the implications and weaknesses of the developments in the cryptoassets markets, in particular warning consumers about the risks.

Likewise, he pointed out that innovations do not come about in isolation but rather require the right environment for experimentation. Of all the elements that work against innovation, he pointed to regulatory uncertainty as probably the most significant. In this sense, the authorities face the challenge of providing a new regulatory framework that balances the promotion of blockchain-based applications and protection against related risks, he concluded.

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