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.