KOREA CAPITAL MARKET INSTITUTE

Blockchain is defined as a computer network technology which ensures the integrity and trust of a ledger (record of transactions) with digitalized public distributed ledger. It first emerged as an operation mechanism of Bitcoin, and is recognized as one of the most important and disruptive innovations since the internet.

Blockchain has some unique features. Blockchain has the P2P (peer-to-peer) network structure without a ‘trusted third party.’ All participants (nodes) in a blockchain network store and update the ledger. Verification of the validity of transactions, and confirmation of a block are conducted by network participants with a programmed ‘consensus algorithm.’ And the whole process in blockchain is strongly secured by highly sophisticated cryptographic technologies. Due to some strengths of blockchain such as strong security, fast processing of transactions and the potential of huge cost reduction, blockchain draws explosive attention from various industries and governments around the world.

Blockchain used in Bitcoin or Ethereum is ‘permissionless’ one in the sense that anyone can participate in the network as a node without permission or approval. But the consensus is that ‘permissioned’ blockchain in which a new member can be added to the network only with the permission of incumbent members will be adopted for industry or business purpose.

Capital markets are widely believed to be an area in which strengths of blockchain can be made the best use of because trading of assets took place incessantly among a number of market participants, and also because accurate updating and secure storage of ownership transfer records are important. Currently, most capital market players concentrate their efforts for adopting blockchain technology on the ‘post-trade processing’ among the whole capital markets value chain. Also exchanges, Nasdaq and KRX for example, are developing the blockchain-based trading platforms for private companies.

Industry-wide collaboration is essential for successful adoption of blockchain technology in capital markets. Therefore, an industry-wide blockchain consortium composed of exchanges, depositaries, CCPs, broker-dealers, tech companies and regulatory authorities should be organized. Key agendas to be discussed will include the area or function where blockchain technology to be adopted, required technology standard, governance, coordination of interests of participating organizations and sharing of development costs.

The most important role of regulatory authorities is to minimize legal/regulatory uncertainties so as for the adoption of blockchain technology not to be hindered. For instance, legal foundation for issuing and trading of crypto-securities needs to be provided. Close communication with industry is crucial for playing this role effectively.