Lagarde warns of blockchain disruption to clearing and settlement sectors

The influential head of the International Monetary Fund (IMF) today warned that the blockchain technology underpinning cryptocurrencies threatens to cut a swathe through the financial infrastructure industries.

In a blog posted today on the IMFs website, Christine Lagarde highlighted smart contracts, which carry out transactions automatically without intervention from an external party, as one of the technologies which could cause the biggest changes to industries such as clearing and settlement.

“Self-executing and self-enforcing smart contracts could eliminate the need for some intermediaries,” said Lagarde.

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The clearing industry, by which currencies and securities are exchanged after payment is actually pledged, is an integral part of the global financial industry, but distributed ledgers stored on blockchains could remove the need for trusted central clearing houses in trades.

Distributed ledger technology “could help financial markets function more efficiently”, Lagarde said. However, the effects on the clearing industry have already started to be felt, with Lagarde referring to plans from the Australian Securities Exchange to use blockchain technologies for equity transactions.

The clearing industry has gained in political salience in the UK since the Brexit vote in 2016. A report by accountants EY suggested as many as 83,000 jobs could move out of London if the clearing of euro-denominated assets is forced to the continent. However, this did not take into account the possibility of structural changes to the industry.

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Lagarde noted that fintech disruption “will not eliminate the need for trusted intermediaries, such as brokers and bankers”.

On the broader potential of blockchain, meanwhile, Lagarde said crypto-assets could have a “significant impact on how we save, invest and pay our bills”.

She said: “Decentralised applications spurred by crypto-assets will lead to a diversification of the financial landscape, a better balance between centralised and decentralised service providers, and a financial ecosystem that is more efficient and potentially more robust in resisting threats.”

Crypto-assets “small footprint and limited links to the rest of the financial system” mean they do not currently pose systemic dangers, Lagarde said.

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