The Too-Big-To-Fail Problem and the Blockchain Solution

TY - JOUR

T1 - The Too-Big-To-Fail Problem and the Blockchain Solution

AU - Schillig, Michael

PY - 2022/7/3

Y1 - 2022/7/3

N2 - The paper seeks to ascertain whether and to what extent blockchain technology may contribute to solving the politically and socially intractable problems of effectively resolving distressed TBTF financial institutions. It revisits the TBTF problem in the light of the Global Financial Crisis and COVID-19 and provides an overview of the constantly evolving DLT/blockchain ecosystem. It further seeks to address the main arguments commonly advanced by blockchain sceptics against the more widespread adoption of crypto-assets. Given blockchain’s capacity for decentralization, transparency and automation, the technology seems particularly well suited for tackling TBTF. On that basis, the paper discusses the potential impact of blockchain technology on (TBTF) bank resolution in three possible scenarios. Gradual adoption over the next five years may significantly improve the resolution process primarily through enhanced transparency of the blockchain-recorded history of assets and transactions. Over the next decade, a ‘smart securities world’ may emerge where bail-in could be automated and systemically important assets and liabilities resolved through distributed financial market infrastructures (dFMIs). The final scenario, with a 20-year horizon, is a fiat cryptocurrency in a reformed financial system where banking panics are eradicated. These scenarios are speculation. However, the basic technological building blocks are already available today and with improved scalability, more reliable smart contract execution and widespread adoption over time they could help to significantly improve the resolvability of TBTF institutions.

AB - The paper seeks to ascertain whether and to what extent blockchain technology may contribute to solving the politically and socially intractable problems of effectively resolving distressed TBTF financial institutions. It revisits the TBTF problem in the light of the Global Financial Crisis and COVID-19 and provides an overview of the constantly evolving DLT/blockchain ecosystem. It further seeks to address the main arguments commonly advanced by blockchain sceptics against the more widespread adoption of crypto-assets. Given blockchain’s capacity for decentralization, transparency and automation, the technology seems particularly well suited for tackling TBTF. On that basis, the paper discusses the potential impact of blockchain technology on (TBTF) bank resolution in three possible scenarios. Gradual adoption over the next five years may significantly improve the resolution process primarily through enhanced transparency of the blockchain-recorded history of assets and transactions. Over the next decade, a ‘smart securities world’ may emerge where bail-in could be automated and systemically important assets and liabilities resolved through distributed financial market infrastructures (dFMIs). The final scenario, with a 20-year horizon, is a fiat cryptocurrency in a reformed financial system where banking panics are eradicated. These scenarios are speculation. However, the basic technological building blocks are already available today and with improved scalability, more reliable smart contract execution and widespread adoption over time they could help to significantly improve the resolvability of TBTF institutions.

M3 - Article

JO - Berkeley Business Law Journal

JF - Berkeley Business Law Journal

ER -