Blockchain Revolution

Risk Management: Blockchain technology promises to mitigate several forms of financial risk. The first is settlement risk, the risk that your trade will bounce back because of some glitch in the settlement process. The second is counterparty risk, the risk that your counterparty will default before settling a trade. The most significant is systemic risk, the total sum of all outstanding counterparty risk in the system. Vikram Pandit called this Herstatt risk, named after a German bank that couldn’t meet its liabilities and subsequently went under: “We found through the financial crisis one of the risks was, if I’m trading with somebody, how do I know they’re going to settle on the other side?” According to Pandit, instant settlement on the blockchain could eliminate that risk completely. Accountants could look into the inner workings of a company at any point in time and see which transactions were occurring and how the network was recording them. Irrevocability of a transaction and instant reconciliation of financial reporting would eliminate one aspect of agency risk—the risk that unscrupulous managers will exploit the cumbersome paper trail and significant time delay to conceal wrongdoing.