Businessmans crew working banking investment project modern office.Man holdingAn increasing number of financial institutions and fintech companies are coming together to create consortia or shared utility service providers that will identify, design, build and provide emerging technologies like blockchain and the possibility of using decentralized, distributed ledger technology that can be accessed and used by market participants to record information.

Rather than keeping its own record of numerous relevant events about a transaction each bank could instead, using blockchain technology, hold a copy of a ledger that is used to record this information according to a common standard, with every change in the information about a client, ownership to an asset traded or action performed between participants recorded in each copy of the ledger held by those participants. So the potential benefits of using blockchain to ensure that transactions are recorded accurately, that contracts are automatically performed according to their terms and that information about clients has been provided correctly by every market participant are clear. However, there are a number of challenges for any consortium trying to launch this technology to overcome.

Building a Consortium and Establishing the Benefits from Participating in it

Defining the objectives of the consortium and the role that each member will have in its success can be difficult to establish, with each participant often having different and competing interests. While some financial institutions will try to influence the consortium in that way so that the outcome will satisfy their particular standards and legal requirements, others may focus more on the potential financial return resulting from the successful exploitation of the technology. Still others may have joined to obtain a seat at the table. Service providers meanwhile may be interested in creating, marketing and launching the solution as quickly as possible in order to establish themselves as the preeminent players within the industry, to maximize the return on their investment and to expand their business into other areas with or without the partner banks. These differences can often create tension over the direction and operation of the consortium between members. To keep this system functioning properly it is very important to clearly define the rights and obligations of every participant in a memorandum of understanding executed at the start of the project.

Establishing Ownership and Exploitation of the Technology

Agreeing who will own and will be able to exploit the developed technology is critical to the success of any initiative. While the foundations of blockchain and similar technologies may be built on open source software which allows quick and free development, the project consortia will frequently require their members to contribute their own software, materials and know-how to the project, which may result in complex and thorough negotiations between the participants regarding the use of each other’s intellectual property. Otherwise consortium members risk losing control over their intellectual property, with rivals potentially able to use it to develop, monopolize and exploit the technology created from it, to the detriment of the contributing participant and others in the industry and the success of the initiative.

Understanding the Regulatory Environment in which the Technology will Operate

As banks and other financial institutions cannot outsource their responsibilities to regulators, the understanding of how new adapted technological solutions can be used in compliance with the laws and existing regulatory framework is crucial.

For example, while blockchain may allow financial institutions to share, validate and update information about the identities of the ultimate shareholders of common clients, it is important to protect privacy rights of individuals in different countries, such as the right to object to the distribution of information about them and the so called “right to be forgotten”. Similarly, although financial institutions may be willing to share information about the identity of its clients, a bank may not be able to accept any liability to other banks for any inaccuracies in the information it has provided, preventing those other banks from relying on it for anti-money laundering, client onboarding and other compliance purposes.

A Look Ahead

So while there are many potential benefits of using blockchain and other similar technologies in the financial services industry, there are also a number of strategic and legal challenges which the consortia developing them will need to overcome.

A version of this article was first published in Financial IT on 7 December 2016 –

iStock_000057858038_XXXLargeAny digital record of bank deposits opens up the possibility that its underlying set of data may be copied and that the nominal amount deposited may be spent more than once. With conventional bank deposits, banks monitor the digital records and are trusted to ensure their validity. With so-called “digital currencies” like Bitcoin, by contrast, the ledger containing the record of all transactions by all users is available to the public. Rather than requiring users to have trust in a central third party, reliance is placed upon the network and the algorithmic rules established to reliably change the ledger. The authentication technologies underpinning Bitcoin – known as distributed ledger or Blockchain-technologies – enable multiple instances of data to be synchronized and updated.

The attractions of this technology for processing and accounting for transactions look set to move further into the mainstream of commerce. In January 2016, the UK government published a report setting out how this technology could transform the delivery of public services and boost productivity. On 15 February 2016, the German Financial Supervisory Authority (BaFin) issued a statement regarding possible fields of application of distributed-ledger-technologies (DLT). In addition, a number of banks have already been exploring the possible uses of Blockchain in the financial services market with several of them investing in companies developing the technology. For example, the Bank of England even stated in its Quarterly Bulletin 2014 Q3 that it was “at least conceivable that a financial institution could issue IOUs [I Owe You] to the public that were denominated in a digital currency.” Moreover, the Australian Stock Exchange recently announced that it is looking at using distributed ledger technology for clearing and settlement services in the cash equities market. We also expect application of this technology in the healthcare industry to be developed further in 2016.


Mobile Facebook page of Bitcoin with dollars and pesosVirtual currencies, especially Bitcoins, have attracted much public attention as well as scholarly interest. Many related issues have, however, not yet been fully clarified and are still being addressed in specialized literature. Particularly whether, despite the fact that they do not have legal tender status in any jurisdiction, Bitcoins could be qualified as “money”, both from a legal and an economic point of view. From a legal perspective, the question whether or not a medium fulfils economic functions of money has proven to be relevant – for example, some US court rulings have taken a functional approach when qualifying Bitcoins as money in a legal sense.

In SEC v. Shavers, WL 4028182 (E.D. Tex. Aug. 6, 2013), the US District Court for the Eastern District of Texas ruled that because Bitcoins “can be used to purchase goods or services, and […] used to pay for individual living expenses”, investments in Bitcoin-related opportunities were “investments of money” and, thus, subject to federal securities regulation. Similarly, in addressing a federal money laundering charge the US District Court for the Southern District of New York in Faiella et al. v. United States, WL 4100897 (S.D.N.Y. Aug. 19, 2014), relied upon a dictionary definition of “money” to conclude that Bitcoin “clearly qualifies as ‘money’” as it “can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.”

Whilst in Germany, virtual currencies have not yet been the subject of any judicial decisions, economic functions of money have played a role, for example, in the interpretation of the term “money” within the meaning of section 935(1) of the German Civil Code (BGB). The German Federal Court of Justice (BGH) held that Euro collectors’ coins – despite acknowledging their legal tender status – were not covered by the term “money” as they lack the necessary “qualities of money”.

Although, in all the aforementioned cases, the issue of economic functions of money or the influence of these features on “money-quality” was deemed somewhat crucial in the interpretation of the law, it has not been discussed to any significant extent. This fact is surprising considering that the issue has spawned a considerable amount of research literature. The acceptance of Bitcoins is obviously much lower than with legal tender or foreign currencies, but there is no denying that Bitcoins do, in a certain number of cases, detach the exchange of goods and services from the satisfaction of mutual needs. According to an article in the online journal International Business Times, for example, Bitcoins are now accepted by 100.000 merchants worldwide – among them are IT giants Dell and MicrosoftIt is, however, not currently possible to say whether and how fast acceptance of Bitcoins or other forms of virtual currencies will increase in the future. A survey conducted on behalf of the German industry association Bitkom in May 2015 revealed that 53 percent of Germans between age 14 and 29 and 36 percent of all Germans can imagine using or purchasing Bitcoins. Thus, there are approximately 25 million potential users living in Germany.


The role Bitcoins will play in the future will, among other things, depend on their precise legal classification. For example, on 16 July 2015 the Advocate General of the Court of Justice of the European Union (C‑264/14) urged the Court to find that cryptocurrency transactions are exempt from Value Added Tax under Article 135(1)(e) of the VAT Directive (2006/112/EC) because Bitcoins fulfil the economic functions of money. Thus, merchants dealing in cryptocurrency will no longer have to fear the possibility of double taxation on Bitcoin transactions. While ths may lead to increased acceptance of Bitcoins as a medium of exchange, it is still unclear what lead the Advocate General to believe that Bitcoins could by qualfied as “money” in the first place. She simply stated that the sole purpose of buying and selling Bitcoins is to exchange them for other goods and services. Empirical evidence indicates, however, that users approaching digital currencies are not primarily interested in an alternative transaction system, but instead, seek to participate in an alternative investment vehicle.