FSOC Highlights Risks of Blockchain, Marketplace Lending

In its annual report and during its public session yesterday, the Financial Stability Oversight Council trained scrutiny on the potential risks posed by the growing use of new financial products and delivery mechanisms, including marketplace lending and distributed ledger or blockchain technology.

“[R]isks embedded in new products and practices may be difficult to foresee,” the council said. “Financial regulators will need to continue to be vigilant in monitoring new and rapidly growing financial products and business practices, even if those products and practices are relatively nascent and may not constitute a current risk to financial stability.”

FSOC’s comments on blockchain technology represent the first time the body overseeing U.S. financial stability has raised the concern. While distributed ledgers are viewed by many in the financial industry as a secure way to reduce third-party transaction costs and risk exposures, FSOC warned that “operational vulnerabilities associated with such systems may not become apparent until they are deployed at scale” and that some systems may be vulnerable to fraud executed through collusion among a significant fraction of participants in the system.”

As it has in the past, the FSOC report also highlighted risks associated with capital and liquidity, wholesale funding, housing finance and interest rate shifts, noting that regulators are seeking to address these through existing supervision or, in the case of housing finance, waiting for action from Congress on the future of the government-sponsored enterprises.