232
Is Disruptive Blockchain Technology
the Future of Financial Services?
Lawrence J. Trautman has a JD, Oklahoma
City University School of Law; MBA, The George
Washington University; and BA, The American
University. Mr. Trautman is Assistant Professor
of Business Law and Ethics, Western Carolina
University, and is a past president of the New
York and Metropolitan Washington/Baltimore
Chapters of the National Association of Corpo-
rate Directors and of the Dallas Internet Society.
I. Introduction
The American corporate graveyard is
littered with prior darlings of Wall Street
and pillars of the New York Stock Ex-
change, such as Kodak and Polaroid (both
photography pioneers). More recently,
other businesses and entire industries that
were once household names have similar-
ly experienced plummeting demand: pay
telephone manufacturers; travel agencies;
wrist watch manufacturers; print news
QUARTERLY REPORT
By Lawrence J. Trautman
media such as newspapers and maga-
zines; and many traditional brick and
mortar retailers (replaced by electronic
alternatives such as Amazon). A com-
mon theme is that all of these businesses
have become completely or substantially
obsolete due to digitized technology.
Now, the equivalent disruptive tech-
nological revolution in financial services
is underway. During recent years, rapid
technological advances have resulted
in a sea change to the way most of the
world conducts and regulates financial
services. While the implications are
vast and the ultimate ramifications are
largely unknown at this time, this ar-
ticle: examines the brief but important
history of virtual currencies in general;
considers the impact of Bitcoin in par-
ticular; and explores the promise for
widespread application of Bitcoin’s un-
derlying blockchain technological plat-
form to the financial services industry.
This article proceeds in five parts,
as follows. ˇirst, there is a discussion
of disruptive changes taking place in
financial services. Second, the article
briefly explores virtual currencies and
the genesis of Bitcoin. Third, there is an
explanation of blockchain technology --
what it is and why it is important. ˇourth,
the article discusses recent developments
that provide a validation of blockchain
applications to financial services mar-
kets. ˇinally, there is a brief review of
regulatory challenges to the adoption of
this new technology. A purpose of this
article is to enhance the reader’s under-
standing of the promises and challenges
faced by financial service providers due
to these rapid advances in technology.
II. Disruptive Changes in
Financial Services
A. Introduction
The gathering of financial industry
leaders at the 2016 World Economic
ˇorum provided a number of startling
predictions as to the near future of fi-
nancial services. An apparent lesson is
that global financial, economic, legal
and political systems will need to adapt
quickly to the resulting challenges and
opportunities. Among the most interest-
ing observations relating to these near-
term scenarios were that: “cash in ten
years probably won’t exist;”1 and block-
chain technology will be used to collect
taxes (also within ten years).2 Elsewhere,
during early 2016 news reports indicated
that “Andrey Sharov, a vice president at
Russia’s Sberbank, said banks would dis-
appear by 2026 due to the rising use of
blockchain technology. ‘In 10 years, there
will be no banks, I’m afraid,’ according
to a translation of Sharov’s comments
by the Coinfox bitcoin news website.”3
B. Enabling Technology
The tremendous growth in data
processing ability and a resultant de-
crease in transaction costs enable the
provision of innovative technological
products and services that would have
1. See John Cryan, Co-Chief Executive of Deutsche Bank AG,
The Transformation of ˇinance, ˇintech @ Davos World
Economic ˇorum: Remarks at the World Economic ˇorum,
Davos, Switzerland (2016), https://www.youtube.com/
watch?v=AsetntXCPRQ (last viewed May 5, 2016).
2. See What is Blockchain, World Economic ˇorum Video (2016),
https://www.youtube.com/watch?v=6WG7D47tGb0.
3. See Arjun Kharpal, Blockchain Won’t Kill Banks: Brock
Pierce, CNBC.com (April 11, 2016), available at http:
//www.cnbc.com/2016/04/11/blockchain-wont-kill-banks-
brock-pierce.html (last viewed May 10, 2016).

been impossible just a few years ago.4
Co-founder of chip maker Intel, Gordon
Moore’s prediction (known as Moore’s
Law) of over fifty years ago that com-
puter “processor power will double every
two years, still holds true a half century
later.”5 ˇor years now, “many technolo-
gists have forecast the demise of Moore’s
[prediction of a] doubling…, and Moore
himself states that this exponential
growth can’t last forever.”6 However,
the development of new advances in
Hybrid-Memory-Cube (HMC) technol-
ogy along with Non-Volatile Dual-Inline
Memory Modules (NVDIMMs) resulted
in technologist Jim O’Reilly observing
Exhibit 1
Average Cost of Hard Disc Drive Storage12
Source: Statisticbrain.com
4. See Annie Sneed, Moore’s Law Keeps Going, Defying Expecta-
tions, Scientific American (May 19, 2015), available at http:
//www.scientificamerican.com/article/moore-s-law-keeps-go-
ing-defying-expectations/ (last viewed May 6, 2016).
5. See Sneed, id.
6. Id.
QUARTERLY REPORT
in April 2016 that “it’s easy to see that
servers are about to undergo the larg-
est revolution in design in decades.”7
Prominent economists and informa-
tion technology (IT) productivity re-
searchers have noted that “information
technology has had major effects on
industry-level productivity…on aver-
age the use and production of IT capital
accounted for ‘roughly two-thirds of the
post-1995 step-up in labor productivity
growth,’ which grew from 1.5% a year
between 1973 – 1995 to over 2.8 percent
after 2000.”8 In general, “the impact of
[Networking and Information Technol-
7. See Jim O’Reilly, NVDIMM: A New Breed of Storage:
An Emerging Storage Technology Promises Big Perfor-
mance Benefits for Data Centers and Smartphones Alike,
Network Computing, (April 29, 2016), available at http:
//www.networkcomputing.com/author/4491873 (last viewed
May 6, 2016).
8. See: Bhavya Lal, Sam Blazek, David Bray, Jennifer Chen,
Nayanee Gupta, Seth Jonas, Mario Nunez & Eddy Shyu,
Analytical Support to the President’s Council of Advisors
on Science and Technology (PCAST) on the Networking and
Information Technology Research and Development (NITRD)
Program Assessment, Sci. & Tech. Pol’y Inst. (STPI) (Sept.
15, 2010), available at https://www.whitehouse.gov/sites/
default/files/microsites/ostp/pcast-stpi-nitrd-9-15-2010.pdf
(last viewed May 6, 2016), citing DALE JORGENSON, MUN S. HO
& KEVIN STIROH, PRODUCTIVITY, VOL. 3: INˇORMATION TECHNOL-
OGY AND THE AMERICAN GROWTH RESURGENCE 353 (Cambridge,
MIT Press 2005); Stephen Oliner, et al. Explaining a Productive
Decade, Brookings Papers on Econ. Activity 81 (2007), avail-
able at http://www.federalreserve.gov/Pubs/feds/2007/200763/
200763pap.pdf. (last viewed May 6, 2016).
233
ogy (NIT)] on productivity levels, as well
as economic and organizational advance-
ment, in other sectors, though frequently
obscure, is increasingly undeniable.”9 In
particular, as depicted in Exhibit 1, it
is the precipitous drop in cost of data
storage (purchase price of $437,500
per Gigabyte in 1980 to just $0.03 per
Gigabyte in 2014), that provides the
viability for blockchain technologies.10
As an example of “fully-managed
zero-Ops analytics data warehouses,” as
of early 2016, Google BigQuery offered
pricing for long-term storage for as little
as “just a penny per GB per month.”11
9. See Lal, et al., supra note 8 at 7-1. See also: Dale W. Jorgenson,
Mun S. Ho & Kevin J. Stiroh, J. A Retrospective Look at the
U.S. Productivity Growth Resurgence, ˇRB of New York Staff
Report No. 277 (2007) (recognizing that information technol-
ogy was critical to the U.S. labor productivity growth of the
1990s), http://ssrn.com/abstract=970660; Susanto Basu, Luigi
Pascali, ˇabio Schiantarelli & Luis Servén, Productivity and
the Welfare of Nations, World Bank Policy Research Work-
ing Paper No. 6026 (2012), http://ssrn.com/abstract=2034785;
Sinan Aral, Erik Brynjolfsson & D. J. Wu, Which Came ˇirst,
it or Productivity? Virtuous Cycle of Investment and Use in
Enterprise Systems (2006), http://ssrn.com/abstract=942291;
Nathaniel Bulkley & Marshall W. Van Alstyne, Why Informa-
tion Should Influence Productivity, MIT Sloan Research Paper
No. 4680-08 (2004), http://ssrn.com/abstract=518242; ˇaruk A.
Khan, New Product Technology, Accumulation, and Growth,
World Bank Policy Research Working Paper No. 3846 (2006),
http://ssrn.com/abstract=922972; Stephen D. Oliner & Daniel E.
Sichel, The Resurgence of Growth in the Late 1990s: Is Infor-
mation Technology the Story?, ˇEDS Working Paper No. 2000-
20 (2000), http://ssrn.com/abstract=233139; ERIK BRYNJOLˇSSON
& ADAM SAUNDERS, WIRED ˇOR INNOVATION: HOW INˇORMATION
TECHNOLOGY IS RESHAPING THE ECONOMY (MIT Press 2010), http:
(Continued on next page)
 234
C. Important but Mixed
Results
The technological advances of the past
half century have provided great cost ef-
ficiencies to businesses and consumers,
including: cost savings in loan servicing
due to management information systems
and data processing automation (the
1960s and 1970s); creation of the Inter-
net and its growth (since the 1990s); and
making “social media possible, [so that]
billions of people, as well as thousands
of corporations are now connected and
interacting on a daily basis. [Moreover,
the] world has also been able to lever-
age unused assets in the sharing economy,
which in many cases is powered by finan-
cial technology (fintech) firms.”13 How-
ever, of course, the same technological
advances also have presented highly
effective tools for criminals,14 creating
new challenges for consumers, busi-
nesses and law enforcement agencies.
9. (Continued from previous page)
//ssrn.com/abstract=2344976; Robert B. Cohen, Enterprise
Spending on Cloud Services Will Expand US GDP, Jobs and
Tech Spending. A New ˇorecast Predicts the US Economy Will
Gain Nearly 3 Trillion Dollars in GDP and 8 Million New Jobs
from 2015 to 2025 (2016), http://ssrn.com/abstract=2775292;
G. S. Popli & Gaurav Sarin, ˇactors that Influence Selection
of Cloud ERP for Indian SMEs: An Empirical Study (2015),
http://ssrn.com/abstract=2707480. But see: Martin Hilbert,
Big Data for Development: ˇrom Information- to Knowledge
Societies (2013), http://ssrn.com/abstract=2205145; Robert J.
Gordon, The Demise of U.S. Economic Growth: Restatement,
Rebuttal, and Reflections, NBER Working Paper No. w19895
(2014), http://ssrn.com/abstract=2396721.
10. See Statistic Brain, Average Cost of Hard Drive Storage, http:
//www.statisticbrain.com/average-cost-of-hard-drive-storage/
(last viewed May 6, 2016).
11. See Google Cloud Big Data and Machine Learning Blog,
Google BigQuery Cuts Historical Data Storage Cost in Half
and Accelerates Many Queries by 10X (Mar. 24, 2016), https:
//cloud.google.com/blog/big-data/2016/03/google-bigquery-
cuts-historical-data-storage-cost-in-half-and-accelerates-
many-queries-by-10x (last viewed May 6, 2016).
12. See Statistic Brain, supra note 10.
13. See Gareth W. Peters & Efstathios Panayi, Understanding
Modern Banking Ledgers through Blockchain Technologies:
ˇuture of Transaction Processing and Smart Contracts on the
Internet of Money, arXiv:1409.1451 (2014).
14. See generally: Lawrence J. Trautman, Cybersecurity: What
About U.S. Policy?, 2015 U. Ill. J. L. Tech. & Pol’y 341 (2015),
available at http://ssrn.com/abstract=2548561; Lawrence J.
Trautman & George P. Michaely, The SEC & The Internet:
Regulating the Web of Deceit, 68 Consumer ˇin. L. Q. Rep. 262
(2014), available at http://www.ssrn.com/abstract=1951148;
Lawrence J. Trautman, Jason Triche & James C. Wetherbe, Cor-
porate Information Governance Under Fire, 8 J. Strat. & Int’l
Stud. 105 (2013), available at http://ssrn.com/abstract=2314119;
Lawrence J. Trautman & Kara Altenbaumer-Price, The Board’s
Responsibility for Information Technology Governance, 28 J.
(Continued in next column)
QUARTERLY REPORT
III. Bitcoin and Virtual Currency
Progeny
A. Introduction
The genesis of Bitcoin can be
traced back to virtual online currencies
that developed during the mid-1990s
within massive multiplayer online
games (MMOGs) such as World of
Warcraft, and other virtual environ-
ments such as DiabloIII, Everquest,
Second Life, and Ultima Online. 15
B. Algorithmic Digital
Currencies
As of May 6, 2016 Coinmarketcap.com
listed 702 different cybercurrencies, hav-
ing a total market capitalization of ap-
proximately US$8.629 billion.16 Ranked
by market capitalization, the top ten
of these cybercurrencies as of May 6,
2016 were: Bitcoin ($7.063 billion);
14. (Continued from previous column)
Marshall J. Computer & Info. L. 313 (2011), available at http:
//www.ssrn.com/abstract=1947283; Lawrence J. Trautman,
E-Commerce and Electronic Payment System Risks: Lessons
from PayPal, 16 U.C. Davis Bus. L.J. [forthcoming], available
at http://www.ssrn.com/abstract=2314119.
15. See Lawrence J. Trautman & Alvin C. Harrell, Bitcoin vs.
Regulated Payment Systems: What Gives?, 38 Cardozo L. Rev.
[forthcoming], available at http://ssrn.com/abstract=2730983.
See also generally: Jun-Sok Huhh, An Economic Analysis
on Online Game Service (Aug. 28, 2009), http://ssrn.com/
abstract=1335120; Hiroshi Yamaguchi, An Analysis of Virtual
Currencies in Online Games (Sept. 1, 2004), http://ssrn.com/
abstract=544422; Vili Lehdonvirta, Virtual Item Sales as a Rev-
enue Model: Identifying Attributes that Drive Purchase Deci-
sions, 9 Electronic Commerce Research 97 (2009), available
at http://ssrn.com/abstract=1351769; Levent V. Orman, Virtual
Money in Electronic Markets and Communities, ICAST Journal
of Institute for Communication, Social Informatics, and Tech-
nology, forthcoming (Johnson School Research Paper Series
No. 27-2010) (June 7, 2010), http://ssrn.com/abstract=1621725;
Sulin Ba & Dan Ke, Optimal Pricing and Permissions Strategy
for Virtual Good Creators in Second Life (Sept. 15, 2008),
http://ssrn.com/abstract=1271684; David A. Bray & Benn
Konsynski, Virtual Worlds: Multi-Disciplinary Research
Opportunities, The Data Base for Advances in Information
Systems, Special Issue on Virtual Worlds (2007), available at
http://ssrn.com/abstract=1016485; Sukwon Thomas Kim, Why
Bitcoin?: Structure and Efficiency of Markets for Online Game
Currency (Dec. 18, 2013), http://ssrn.com/abstract=2334000;
Matthew Elias, Bitcoin: Tempering the Digital Ring of Gy-
ges or Implausible Pecuniary Privacy (Oct. 3, 2011), http:
//ssrn.com/abstract=1937769; Vili Lehdonvirta, Real-Money
Trade of Virtual Assets: New Strategies for Virtual World
Operators; in Virtual Worlds 113 - 137 (Ipe, Mary, ed., Icfai
University Press, Hyderabad, India (2008)), available at http:
//ssrn.com/abstract=1351782.
16. Coinmarketcap.com, Crypto-Currency Market Capitalizations
(May 6, 2016), http://coinmarketcap.com/.
Ethereum ($781 million); Ripples ($222
million); Litecoin ($171 million); Dash
($42 million); DigixDAO ($29 million);
MadeSafeCoin ($26 million); Dogecoin
($23 million); NEM ($14 million); and
Monero ($10 million).17 As of this date,
Bitcoin represented 81.9 percent of total
crypto-currency market capitalization.18
C. Bitcoin
The creation of Bitcoin in 2009 is
attributed to Satoshi Nakamoto, be-
lieved by many to be a pseudonymous
hacker or hackers.19 “Based on ideas
from b-money20 and Hashcash,”21 your
author has described Bitcoin as “a cryp-
tographic object represented as a chain
of digital signatures over the transac-
tion in which the coin was used.” 22
Thus, “Bitcoin ‘aims to be completely
distributed, free of central authorities or
points of control, and at least somewhat
anonymous.”’23 This virtual currency is
17. Id.
18. Id.
19. See Simon Barber, Xavier Boyen, Elaine Shi & Ersin Uzun,
Bitter to Better–How to Make Bitcoin a Better Currency,
Proceedings of 16th International Conference on ˇinancial
Cryptography and Data Security 1 (ˇeb. 27, 2012), avail-
able at http://crypto.stanford.edu/~xb/fc12/bitcoin.pdf; But
see: Julianne Pepitone, Bitcoin Creator Satoshi Nakamoto
Found, Newsweek Says, NBC News (Mar. 6, 2014), http:
//www.nbcnews.com/tech/tech-news/bitcoin-creator-satoshi-
nakamoto-found-newsweek-says-n45871 (identifies a 64-
year-old California resident as the creator); Nathaniel Popper
& Rachel Abrams, Bitcoin’s Mysterious Creator is Said to
be Identified, N.Y. Times, Mar. 6, 2014, available at http:
//dealbook.nytimes.com/2014/03/06/newsweek-unmasks-bit-
coin-founder-stirring-ire/?_php=true&_type=blogs&_r=0
(raising doubts about the Newsweek report); Paul Vigna,
Purported Architect of Bitcoin Pulls Back, Wall St. J., May 6,
2016 at C1 (reporting that Craig Steven Wright apologized for
2016 prior claim of being the Bitcoin creator).
20. See Lawrence J. Trautman, Virtual Currencies: Bitcoin & What
Now After Liberty Reserve, Silk Road, and Mt. Gox?, 20 Rich.
J. L. & Tech. 13 (2014), available at http://www.ssrn.com/
abstract=2393537, citing Joshua A. Kroll, Ian C. Davey, &
Edward W. ˇelten, The Economics of Bitcoin Mining or, Bit-
coin in the Presence of Adversaries, The Twelfth Workshop
on the Economics of Information Security (WEIS 2013) 3
(Washington, DC, June 11-12, 2013), citing W. Dai, b-money,
http://www.weidai.com/bmoney.txt (1998), available at http:
//www.weis2013.econinfosec.org/papers/KrollDaveyˇeltenW
EIS2013.pdf.
21. See Trautman, supra note 20, citing A. Back, et al., Hashcash-a
denial of service counter-measure, http://www.hashcash.org/
papers/hashcash.pdf (2002).
22. Id.
23. Id.
 QUARTERLY REPORT 235

“based on a decentralized peer-to-peer
(P2P) network, much like BitTorrent,
the popular protocol for sharing files over
the Internet, such as music, games and
video.”24 Exhibit 2 depicts Bitcoin mar-
ket capitalization as of September 2016.
illegal items anonymously, [and because]
one of the world’s largest bitcoin ex-
changes, Mt. Gox, collapsed in 2014…
that’s why you hear major banks saying
bitcoin bad, blockchain good…And bit-
coin as the pioneer takes the arrows in
D. The Economics and
Technology of Bitcoin
By late 2013, “an increase in media
attention and publicity surrounding U.S.
Senate hearings resulted in Bitcoin in-

Exhibit 2
Bitcoin Market Capitalization25

Source: Blockchain.info

In April 2016, Brock Pierce, Chair- the back… which is probably not war- creasing in value during one seven-day
man of the Bitcoin ˇoundation, stated a ranted.”26 Exhibit 3 illustrates the volatil- period from $615 per Bitcoin to more
belief that the cryptocurrency’s bad repu- ity over time in Bitcoin’s market price. than $1,000 on the Mt.Gox exchange,
tation stemmed from its use “to purchase resulting in a total market capitalization

24. European Central Bank, Virtual Currency Schemes 21 (Oct.

2012), available at http://www.ecb.europa.eu/pub/pdf/other/
virtualcurrencyschemes201210en.pdf (last viewed ˇeb. 14,
2014). See generally: Rostislav Skudnov, Bitcoin Clients
(2012) (unpublished bachelor’s thesis, Turku University of
Applied Sciences) (on file with author), available at http:
//publications.theseus.fi/bitstream/handle/10024/47166/
Skudnov_Rostislav.pdf?sequence=1; David Allen Bronleewe,
Bitcoin NˇC (Aug. 2011) (unpublished M.S. Engineering thesis,
University of Texas at Austin) (on file with author), available
at http://repositories.lib.utexas.edu/bitstream/handle/2152/
ETD-UT-2011-08-4150/BRONLEEWE-MASTERS-
REPORT.pdf?sequence=1.

25. See Bitcoin Market Capitalization, Blockchain.info, https:

//blockchain.info/charts/market-cap?timespan=all&showData
Points=false&daysAverageString=1&show_header=true&sc
ale=0&address= (last viewed May 10, 2016). 26. See Kharpal, supra note 3.
 236
Exhibit 3
Bitcoin Market Price27
(Market Price ($US))
Source: Blockchain.info
in excess of US$11 billion.”28 Bitcoin
has been described as a “Proof-of-Work
(PoW) based currency that allows users
to generate digital coins by performing
computations.”29 As Dorit Ron and Adi
Shamir have observed: “Participants
begin using Bitcoin by first acquiring a
program called a Bitcoin wallet and one
or more Bitcoin addresses.”30 Stored on a
computer’s hard drive as electronic files,
Bitcoins “can be accumulated or trans-
27. See Bitcoin Market Price, Blockchain.info, https://
blockchain.info/charts/market-price?timespan=all&showDat
aPoints=false&daysAverageString=1&show_header=true&s
cale=0&address= (last viewed May 10, 2016).
28. See Lawrence J. Trautman, supra note 20, citing Nick
Bilton, A Surge in Value for Bitcoin and Currencies Similar
to It, N.Y. Times Bits, Nov. 27, 2013, available at http:
//bits.blogs.nytimes.com/2013/11/27/a-rise-in-attention-and-
price-for-crypto-currencies/?_r=0. See also Marie Briere,
Kim Oosterlinck & Ariane Szafarz, Virtual Currency, Tangible
Return: Portfolio Diversification with Bitcoins (Sept.12, 2013),
http://ssrn.com/abstract=2324780.
29. See Lawrence J. Trautman, Virtual Currencies: Bitcoin & What
Now After Liberty Reserve, Silk Road, and Mt. Gox?, 20 Rich.
J. L. & Tech. 13 (2014), available at http://www.ssrn.com/ab-
stract=2393537, citing Elli Androulaki, Ghassan O. Karame,
Marc Roeschlin, Tobias Scherer & Srdjan Capkun, Evaluat-
ing User Privacy in Bitcoin, Proceedings of the ˇinancial
Cryptography and Data Security Conference (ˇC) (2013),
available at http://book.itep.ru/depository/bitcoin/User_pri-
vacy_in_bitcoin.pdf.
30. See Trautman, supra note 20, citing Dorit Ron & Adi Shamir,
Quantitative Analysis of the Full Bitcoin Transaction Graph, In
Proceedings of the 17th International Conference on ˇinancial
Cryptography and Data Security in Okinawa, Japan 3 (2013),
Springer-Verlag, A - R. Sadeghi (Ed.): ˇC 2013, LNCS 7859,
6, Berlin Heidelberg (2013).
QUARTERLY REPORT
ferred just like an e-mail. Software al-
gorithms embedded in the online Bitcoin
network protect against fraud and ensure
that the files are not counterfeited.”31 By
using a peer-to-peer network to distribute
a master transparent public ledger called
the blockchain, each Bitcoin transaction
is registered for all to see. The blockchain
is used to verify that the identical Bitcoins
have not been used in a previous transac-
tion, thereby preventing “double spend-
ing” of the same Bitcoins.32 As Jerry
Brito and Andrea Castillo have observed:
[T]ransactions on the Bitcoin net-
work are not denominated in dol-
lars or euros or yen as they are on
31. See Nicholas Plassaras, Regulating Digital Currencies: Bring-
ing Bitcoin within the Reach of the IMF, 14 Chi. J Int’l L. 5
(2013), available at: http://ssrn.com/abstract=2248419, See
generally: Jorg Becker, Dominic Breuker, Tobias Heide, Jus-
tus Holler, Hans Peter Rauer & Rainier Bohme, Can We Afford
Integrity by Proof-of-Work? Scenarios Inspired by the Bitcoin
Currency, Workshop on the Economics of Information Security
WEIS 2012, Berlin, Germany (ˇeb. 24, 2012), available at http:
//ssrn.com/abstract=2041492; Sarah Jeong, Note, The Bitcoin
Protocol as Law, and the Politics of a Stateless Currency (May
8, 2013), http://ssrn.com/abstract=2294124.
32. Jerry Brito & Andrea Castillo, Bitcoin: A Primer for Policy-
makers, George Mason University Mercatus Center 4 (Dec.
19, 2013); but see Houy Nicolas, It Will Cost You Nothing
to ‘Kill’ a Proof-of-Stake Crypto-Currency (2014), http:
//ssrn.com/abstract=2393940; and see generally Androulaki,
supra note 29 (describing several authors who contend that
double-spending attacks can be successful).
PayPal, but are instead denominated
in bitcoins. This makes it a virtual
currency in addition to a decentral-
ized payments network. The value
of the currency is not derived from
gold or government fiat, but from
the value that people assign to it.
The dollar value of a bitcoin is
determined on an open market,
just as is the exchange rate be-
tween different world currencies.33
London School of Economics Pro-
fessor Garrick Hileman has argued
that: “International remittances are
considered by some to be one of the
most compelling use cases for bitcoin
due to the comparatively higher fees,
poor exchange rates, and the slow and
cumbersome process available through
traditional cross-border payment servic-
es.”34 Exhibit 4 features the list Hileman
has created of a Bitcoin Market Potential
Index (BMPI), consisting of the follow-
ing ten countries having the “highest
relative potential for bitcoin adoption.”35
33. Id.
34. See Garrick Hileman, The Bitcoin Market Potential Index (un-
published paper) (2014), http://ssrn.com/abstract=2752757.
35. Id. at 8.

Exhibit 4
Bitcoin Market Potential Index Top Ten Countries
Additional challenges to the future
growth of Bitcoin result from the August
2015 release of Bitcoin XT 0.11C, where-
by “the Bitcoin world was shaken by a
technical and near-ontological debate in
inner circles of core developers about the
possibility of forking the blockchain, so
as to enhance the timing, execution and
scalability of the cryptocurrency.” 36
Professors Guadamuz and Marsden
have concluded that “Bitcoin has not
matched the expectations of some pro-
ponents. Various crashes, and wave after
wave of scandals and allegations of fraud
have decidedly dented the perception that
Bitcoin is the currency of the future…
[along with] the relative difficulty in
acquiring and spending BTC.”37 And
while “Bitcoin may be the equivalent of
36. See MARC PILKINGTON, BLOCKCHAIN TECHNOLOGY: PRINCIPLES AND
APPLICATIONS, in RESEARCH HANDBOOK ON DIGITAL TRANSˇORMA-
TIONS (ˇ. Xavier Olleros & Majlinda Zhegu, eds. Edward Elgar,
2016), available at http://ssrn.com/abstract=2662660.
37. See Andrés Guadamuz & Christopher Marsden, Blockchains
and Bitcoin: Regulatory Responses to Cryptocurrencies, 20 ˇirst
Monday, 6.0 (Dec. 7, 2015), available at http://ssrn.com/ab-
stract=2704852.
QUARTERLY REPORT
Second Life a decade later, a liberating
technology that is overhyped and poorly
executed, so blockchains may be the
equivalent of Web 2.0 social networks,
a truly transformative technology.”38
Guadamuz and Marsden contend that
Bitcoin’s long-term contribution “is an
idea that turns the blockchain, Bitcoin’s
proof-of-transaction open log, into a
platform for creating a smart contract
decentralized platform. We may be
very well talking about blockchain
in the future with Bitcoin as the first
implementation of an open ledger.”39
IV. The Blockchain
A. Blockchain Technology
Defined
The technology underlying Bitcoin
38. Id.
39. Id.
237
and other virtual currencies is known
as the blockchain. A detailed technical
description of blockchain technology
is beyond the scope of this article, but
may be found in the computer engineer-
ing literature.40 However, at the most
fundamental level, the blockchain can
be defined as “a ledger or, more simply,
a chronological database of transactions
recorded by a network of computers.
The term ‘blockchain’ refers to these
transactions being grouped in blocks,
and the chain of these blocks forms the
accepted history of transactions since
the inception of the blockchain.”41 As
Aaron Wright and Primavera De ˇilippi
have described it: “The blockchain is a
distributed, shared, encrypted-database
that serves as an irreversible and incor-
ruptible public repository of information.
It enables, for the first time, unrelated
people to reach consensus on the oc-
currence of a particular transaction or
event without the need for a controlling
authority.”42 Exhibit 5 illustrates network
recording of ownership through a shared
registry (right side of graphic) versus a
traditional clearinghouse system (left).
Professors Mainelli and Milne have
described this as follows: “Mutual
distributed ledgers (aka blockchains)
record transactions and ownership
using pervasive, persistent, and
permanent data structures replicated
across numerous computers…Everyone
has the same ‘view’ of the same
40. See Gareth W. Peters & Efstathios Panayi, Understanding
Modern Banking Ledgers through Blockchain Technologies:
Future of Transaction Processing and Smart Contracts on the
Internet of Money, arXiv:1409.1451 (2014). See also: Christian
Decker & Roger Wattenhofer, Information Propagation in the
Bitcoin Network, 13th IEEE Conf. on Peer-to-Peer Comput-
ing 1-10 (2013); Jega Anish Dev, Bitcoin Mining Acceleration
and Performance Quantification, IEEE CCECE 2014 Toronto,
Canada 1-6 (2014); Giuseppe Di Battista, Valentino Di Donato,
Maurizio Patrignani, Maurizio Pizzonia, Vincenzo Roselli, &
Roberto Tamassia, BitconeView: Visualization of Flows in
the Bitcoin Transaction Graph, 2015 IEEE Symposium on
Visualization for Cyber Security (VIZSEC) (2015); Alireza
Beikverdi & JooSeok Song, Trend of Centralization in Bitcoin’s
Distributed Network, IEEE 978-1-4799-8676-7/15 (2015).
41. See Gareth W. Peters & Efstathios Panayi, Understanding
Modern Banking Ledgers through Blockchain Technologies:
Future of Transaction Processing and Smart Contracts on the
Internet of Money, arXiv:1409.1451 (2014).
42. See Aaron Wright & Primavera De ˇilippi, Decentralized
Blockchain Technology and the Rise of Lex Cryptographia
(2015), http://ssrn.com/abstract=2580664.
 238
Exhibit 5
Distributed Ledger System43
Source: Euroclear & Oliver Wyman
‘data’, though they may be retriev-
ing the data from different physical
sources.”44 ˇurthermore, the blockchain
technology relies primarily on two com-
ponents, “public-key cryptography and
‘peer-to-peer’ or shared data storage.
The end result is a data source that is
simultaneously logically ‘central’ while
technically ‘distributed’… computers
using the ledger can consult a single
authoritative and immutable ledger of
all the data transactions from the ori-
43. See Euroclear & Oliver Wyman, Blockchain in Capital
Markets: The Prize and the Journey, at 12 (ˇeb. 2016), http:
//www.oliverwyman.com/content/dam/oliver-wyman/global/
en/2016/feb/BlockChain-In-Capital-Markets.pdf (last viewed
May 11, 2016).
44. See Michael Mainelli & Alistair Milne, The Impact and Poten-
tial of Blockchain on Securities Transaction Lifecycle, SWIˇT
Institute Working Paper No. 2015-007, at 3 (2016), available
at http://ssrn.com/abstract=2777404.
45. Id.
QUARTERLY REPORT
gin (‘genesis’) of the data structure.”45
B. Blockchain Applications
The attractive economics that enables
the development and viability of block-
chain-based technologies is produced by:
(1) the massive increase in computer chip
processing speed;46 and (2) the precipitous
drop in the cost of data storage.47 Scholars
point to likely use of the blockchain to
46. See Sneed, supra note 4.
47. See Statistic Brain, supra note 10.
48. See Hiroki Watanabe, Shigeru ˇujimura, Atsushi Nakadaira,
Yasuhiko Miyazaki, Akihito Akutsu & Jay Kishigami, Block-
chain Contract: Securing A Blockchain Applied to Smart Con-
tracts, IEEE Int’l Conf. Consumer Electronics (ICCE) (2016).
See also Melanie Swann, Blockchain Thinking: The Brain as
a Decentralized Autonomous Corporation, IEEE Tech. & Soc.
Mag. 41, 43 (Dec. 2015). See also Wright & De ˇilippi, supra
note 42.
49. See Shigeru ˇujimura, Hiroki Watanabe, Atsushi Nakadaira,
Tomokazu Yamada, Akihito Akutsu & Jay (Junichi) Kishigami,
BRIGHT: A Concept for a Decentralized Rights Management
System Based on Blockchain, 2015 IEEE 5th International
Conference on Consumer Electronics–Berlin (ICCE–Berlin)
345 (2015).
enable such things as: smart contracts;48
digital rights management;49 attractive
business models for the Internet of
Things (IoT);50 protecting personal data;51
digital content distribution;52 voting;53
50. See Yu Zhang & Jiangtao Wen, An IoT Electric Business Model
Based on the Protocol of Bitcoin, 2015 18th International Con-
ference on Intelligence in Next Generation Networks (ICIN),
Paris 184 (2015).
51. See Guy Zyskind, Oz Nathan & Alex ‘Sandy” Pentland, De-
centralizing Privacy: Using Blockchain to Protect Personal
Data, Security and Privacy Workshops (SPW), IEEE 180, 184
(2015).
52. See Jay Kishigami, Shigeru ˇujimura, Hiroki Watanabe, Atsushi
Nakadaira & Akihiko Akutsu, The Blockchain-based Digital
Content Distribution System, 2015 IEEE ˇifth International
Conf. on Big Data and Cloud Computing 187 (2015).
53. See David Moskowitz, Blockchain Based Voting, Using a
Counterparty Token, Coin Republic, YouTube Video (ˇeb.4,
2015), https://www.youtube.com/watch?v=Xsd236ct7Pk (last
viewed May 10, 2016). See also Marcella Atzori, Blockchain
Technology and Decentralized Governance: Is the State Still
Necessary? (2015), http://ssrn.com/abstract=2709713.
54. See Richard Dennis & Gareth Owen, Rep on the Block: A Next
Generation Reputation System Based on the Blockchain, IEEE
The 10th International Conference for Internet Technology and
Secured Transactions 131 (ICITST-2015).

and reputation system enhancement.54
V. Benefit Validation for Financial
Services
A. Disruptive Potential
Professors Peters and Panayi have
opined that: “blockchain technology
[has the] potential to disrupt the world
of banking through facilitating global
money remittance, smart contracts,
automated banking ledgers and digital
assets.”55 In addition, “Blockchain…
may find applications in areas as varied
Exhibit 6
Benefits of Blockchain Adoption60
Source: Euroclear & Oliver Wyman
1. KYC = Know Your Customer, KYCC = Know
Your Customer’s Customer
2. AML = Anti-Money Laundering
55. See Gareth W. Peters & Efstathios Panayi, Understanding
Modern Banking Ledgers through Blockchain Technologies:
Future of Transaction Processing and Smart Contracts on the
Internet of Money, arXiv:1409.1451 (2014).
QUARTERLY REPORT
as transaction processing, government
cash management, commercial bank
ledger administration and clearing
and settlement of financial assets.” 56
B. Concept Validation
Announcements in late 2015 of ma-
jor corporations entering partnerships for
blockchain development include nine of
the world’s largest banks (Barclay’s,
BBVA, Commonwealth Bank of Aus-
tralia, Credit Suisse, Goldman Sachs, JP
Morgan, Royal Bank of Scotland, State
Street, and UBS) in partnership with
56. Id.
57. See Jemima Kelly, Nine of World’s Biggest Banks Join to Form
Blockchain Partnership, Reuters.com (Sept. 15, 2015), avail-
able at http://www.reuters.com/article/us-banks-blockchain-
idUSKCN0Rˇ24M20150915 (last viewed May 9, 2016).
239
financial tech firm R3.57 At the time of
the announcement, David Rutter, R3
Chief Executive Officer, suggested that:
“[t]he first use of this technology might
be the issuance of commercial paper on
the blockchain…I think savings are in
the settlement side, in post trade, in is-
suance, but not in exchange trading or
OTC trading anytime in the future.”58
ˇor capital markets, Exhibit 6 il-
lustrates how “the blockchain vision
is clearly a massive change to the
structure of the capital markets…
[with] benefits across pre-trade, trade,
post-trade and securities servicing.”59
58. Id.
59. See Euroclear & Oliver Wyman, supra note 43.
60. See id.
 240
By March 2016, the R3 consortium
had expanded to forty major financial
institutions and announced completion
of “a trial of five different blockchain
solutions.”61 About a month later, a strate-
gic partnership between R3 and Microsoft
was announced, where “Microsoft Azure
will be the cloud service provider for R3.
Microsoft will provide cloud-based tools,
services and infrastructure for R3 as well
as dedicated technical architects, project
managers, lab assistants and support
services…[and] access to Microsoft’s
blockchain partners which includes the
likes of start-ups Ethereum and Ripple.”62
VI. The Future is Now
A. Immediate Applications
Any attempt to extrapolate timelines
and probable scenarios for the develop-
ment of truly disruptive technologies is
always fraught with risk. However, in
ˇebruary 2016 consultancies Euroclear
and Oliver Wyman advocated that, to
achieve success during the next twelve
to eighteen months, innovators should fo-
cus on “discrete, actionable ‘first order’
use cases, where only a small number of
initial participants is required to gain the
necessary critical mass. These first in-
novations will be in niche applications.
Alterations to narrow areas of existing
processes, and/or bold transformations
of smaller markets, are most likely to be
successful.”63 Exhibit 7 presents a pos-
sible scenario of potential adoption paths.
B. Regulation Struggles to
Keep Up with Technology
61. See Stan Higgins, 40 Banks Trial Commercial Paper Trading
in Latest R3 Blockchain Test, Coindesk (Mar. 3, 2016), http:
//www.coindesk.com/r3-consortium-banks-blockchain-solu-
tions/ (last viewed May 10, 2016).
62. See Arjun Kharpal, Microsoft, Major Banks Strike Blockchain
Deal, CNBC.Com (Apr. 4, 2016), http://www.cnbc.com/2016/
04/04/microsoft-major-banks-strike-blockchain-deal.html (last
viewed May 10, 2016).
63. See Euroclear & Oliver Wyman, supra note 43.
QUARTERLY REPORT
A robust discussion of blockchain and
virtual currency regulation is beyond the
scope of this article. However, a few is-
sues are appropriate for mention here.64
To date, the blockchain applications
receiving the most regulatory attention
are Bitcoin and other virtual currencies.
As Professor Hileman has observed:
“Many policymakers are seeking to gain
a better understanding of the likelihood
that the use of bitcoin (or other cryptocur-
rencies) will gather momentum in their
respective jurisdictions.”65 Because of
“the weight of various historical indica-
tors and in the wake of significant recent
events, regulators adopted an incredibly
aggressive approach to enforcing existing
regulations against the drastically new,
different, and emerging technology.”66
Of major concern, “The resulting barriers
to entry and climate of legal stigma are
stifling the nascent decentralized technol-
ogy industry and preventing further in-
novation.”67 Reyes continues as follows:
History intimates that the self-regu-
latory approach is unlikely to suf-
ficiently resolve the market failures
that will ultimately allow illicit and
fraudulent uses of decentralized
technologies to occur. Meanwhile,
the regulatory approaches suggested
in the literature each impose a new
regulatory barrier to entry even
while trying to alleviate the ineffi-
ciencies of the current landscape.68
Messrs. Guadamuz and Marsden also
have argued that: “self regulation [of vir-
tual currency] has failed.”69 The Uniform
64. ˇor more on the current regulatory struggle to catch up with
the rapid technological advances in financial services, see, e.g.,
Lawrence J. Trautman & Alvin C. Harrell, Bitcoin vs. Regulated
Payment Systems: What Gives?, 38 Cardozo L. Rev. [forthcom-
ing], available at http://ssrn.com/abstract=2730983. See also
Guadamuz & Marsden, supra note 37.
65. See Hileman, supra note 34 at 1.
66. See Carla L. Reyes, Moving Beyond Bitcoin to an Endogenous
Theory of Decentralized Ledger Technology Regulation: An
Initial Proposal, 61 Vill. L. Rev. 191, 194 (2016), available at
http://ssrn.com/abstract=2766705.
67. Id.
68. Id.
69. See Guadamuz & Marsden supra note 37 at 1.0.
Law Commission (ULC) (also known as
the National Conference of Commission-
ers on Uniform State Laws, or NCCUSL)
created a Study Committee on Alterna-
tive and Mobile Payments (Study Com-
mittee) in January 2014 (subsequently
designated a Drafting Committee).70 The
purpose of is to create an optimal licens-
ing system for intermediaries that per-
form financial services for third parties
relating to digital or virtual currencies.71
The Study Committee decided that
the New York regulatory framework
for virtual currencies (New York “Bitli-
cense” Regulation) is “well drafted” and
(with some changes) could serve as a
beginning template for a uniform law.
Accordingly, the October 2015 Meeting
Draft reflected this approach, reflecting
the usual uniform law effort to achieve
both consensus and a rational approach.72
While not a final product (at this
writing), the 2016 Annual Meeting
Draft provides for extensive provisions
to govern: the licensing of digital cur-
rency businesses (Article 2); reports by
and examinations of such businesses
(Article 6); permissible investments
(Article 7); enforcement (Article 8);
administrative procedures (Article 9);
70. See ˇinal Study Committee on Alternate and Mobile Payment
Systems Report (Dec. 19, 2014), http://www.uniformlaws.org/
shared/docs/Alternative%20and%20Mobile%20Payments/AM
PS%20ˇinal%20Committee%20Report%2012-19-14.pdfv [ˇi-
nal Report]. The Chair is Professor ˇred H. Miller; the Reporter
is Professor Sarah Jane Hughes.
71. See NCCUSL, discussion draft, Regulation of Virtual Curren-
cies Act, Oct. 9 – 11, 2015 Drafting Committee Meeting (Oct.
2015 Meeting Draft), Reporter’s Preliminary Note, at 1: “This
initial working draft envisions that any person or entity that
operates as a trusted intermediary in the performance of services
or offering of products to third parties, whether consumers or
not, should be licensed.” This includes:
Digital currency payments intermediaries[;] digital cur-
rency converters and exchanges[;] providers of web wallet
services and products[;] digital currency gateways[;] digital
cash platforms[;] and digital currency ATMs, and is intended
to cover any form of business that handles, stores, maintains,
or transfers or engages in the exchange or delivery of digital
currency for money or real currency or of one form of digital
currency for another….
Id. The Reporter’s Preliminary Note indicates that the Drafting
Committee had yet to determine whether to refer to the subject
matter as “digital currency” or “virtual currency.” Id. at 2. (on
file with author).
72. See, e.g., UCC § 1-103. A subsequent, revised draft was created
for the July 2016 Annual Meeting of the ULC (2016 Annual
Meeting Draft).
73. See 2016 Annual Meeting Draft.

Exhibit 7
Potential Blockchain Adoption Paths
Source: Euroclear & Oliver Wyman
disclosures (Article 10); and Compliance
(Article 11).73 The Draft follows closely
(though in different order) many of the
New York “BitLicense” Regulations.74
At this writing, a remaining significant
issue is the extent to which a proposed
uniform law should go beyond the li-
censing, compliance and enforcement
issues common to the CSBS regulatory
framework and the New York “BitLi-
74. See, e.g., Oct. 2015 Meeting Draft, supra note 71, at 4.
QUARTERLY REPORT
cense” Regulations, to cover substantive
commercial transaction issues as in the
UCC.75 Thus, while at this writing many
issues remain unresolved, this uniform
law drafting project offers an excellent
prospect for reconciling divergent views
in this area of law, and bringing some
needed clarity and uniformity to an
otherwise uncertain (and ever chaotic)
75. Id.
241
legal environment for virtual currencies.
C. Importance of Management
“Tone at the Top”
In their analysis of blockchain benefits
and challenges, professors Mainelli and
Milne observed that: “[a]chieving all the
potential benefits from mutual distributed
ledgers will require board level buy-in
to a substantial commitment of time and
 242
resource, and active regulatory support
for process reform, with relatively little
short term payoff.”76 Cybersecurity is
a major problem for leaders of gov-
ernments, 77 military command, 78 and
corporate governance.79 Much has been
written about enterprise technology risk,
the difficulty of recruiting sufficient di-
versity of talent to corporate boards,80
and cyber experience and technology
domain awareness in particular.81 Infor-
mation technology, in any of its many
forms and uses, remains both: the key
to productivity gains and economic
growth; and a challenge to individual
privacy and a politically stable society.82
D. Legal Enhancements from
Blockchain Technology
76. See Mainelli & Milne, supra note 44 at 1.
77. See Lawrence J. Trautman, Congressional Cybersecurity Over-
sight: Who’s Who & How It Works, 5 J. L. & Cyber Warfare
(2016), available at http://ssrn.com/abstract=2638448.
78. See generally Lawrence J. Trautman, Is Cyberattack The Next
Pearl Harbor?, 18 N.C. J. L. & Tech. [forthcoming 2017],
available at http://ssrn.com/abstract=2711059.
79. See generally Lawrence J. Trautman, The Board’s Responsi-
bility for Crisis Governance [forthcoming], available at http:
//ssrn.com/abstract=2623219; Lawrence J. Trautman, Manag-
ing Cyberthreat, 31 Santa Clara High Tech. L.J. [forthcoming],
available at http://ssrn.com/abstract=2534119.
80. See generally: Lawrence J. Trautman, Boardroom Diversity:
Why Are We Still Talking About This?, 17 Scholar 219 (2015),
available at http://www.ssrn.com/abstract=2047750; Lawrence
J. Trautman & Kara Altenbaumer-Price, D&O Insurance: A
Primer, 1 Am. U. Bus. L. Rev. 337 (2012) (discussing how
risk premiums are determined, in part, based upon board gover-
nance experience and talent), available at http://www.ssrn.com/
abstract=1998080; Lawrence J. Trautman, Who Sits on Texas
Corporate Boards? Texas Corporate Directors: Who They
Are and What They Do, 16 Hous. Bus. & Tax L. J. 44 (2016)
(discussing demand for directors having e-commerce and cyber
expertise), available at http://ssrn.com/abstract=2493569.
81. See generally Lawrence J. Trautman, Who Qualifies as an Audit
Committee Financial Expert Under SEC Regulations and NYSE
Rules?, 11 DePaul Bus. & Com. L.J. 205 (2013) (discussing the
importance of information technology risk), available at http:
//www.ssrn.com/abstract=2137747; Lawrence J. Trautman, The
Matrix: The Board’s Responsibility for Director Selection and
Recruitment, 11 ˇla. St. U. Bus. Rev. 75 (2012) (discussing the
importance of board cyber experience and expertise), available
at http://www.ssrn.com/abstract=1998489.
82. See Kartik K. Ganju, Paul A. Pavlou & Rajiv D. Banker, Does
Information and Communication Technology Lead to the Well-
Being of Nations? A Country-Level Empirical Investigation,
MIS Quarterly [forthcoming] (illustrating how information and
communications technology: helps citizens to develop social
capital; enables better access to health-related information;
and facilitates education and commerce), available at http://
ssrn.com/abstract=2659190. See also Lawrence J. Trautman,
ˇollowing the Money: Lessons from the Panama Papers; Part
1: Tip of the Iceberg [forthcoming] (depicting how big data can
result in political instability and force regime change).
QUARTERLY REPORT
To paraphrase Harvard professor
Lawrence Lessig, code is law and she
who writes the code makes the laws.”83
Zyskind, Nathan and Pentland have
observed that “laws and regulations
could be programmed into the block-
chain itself, so that they are enforced
automatically. In other situations, the
ledger can act as legal evidence for
accessing (or storing) data, since it is
(computationally) tamper-proof.” 84
VII. Conclusion
This article examines some of the
disruptive changes that are likely to
occur in financial services due to rapid
technological advances. In addition, vir-
tual currencies and the genesis of Bitcoin
are examined, along with an explanation
of blockchain technology, e.g., what it
is and why its important. The discus-
sion also includes recent developments
that provide a validation of blockchain
applications to financial services mar-
kets. ˇinally, the article includes a brief
mention of the regulatory challenges to
the adoption of this new technology.
Awareness of the potential for
83. See generally LAWRENCE LESSIG, CODE: AND OTHER LAWS Oˇ
CYBERSPACE, VERSION 2.0 (Basic Books 2006).
84. See Guy Zyskind, Oz Nathan & Alex ‘Sandy” Pentland, De-
centralizing Privacy: Using Blockchain to Protect Personal
Data, Security and Privacy Workshops (SPW), IEEE 180, 184
(2015).
ARTICLES
SOLICITED
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A Brief History…
(Continued from page 115)
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