Blockchain Peer Reviewed Find a peer reviewed article pertaining to blockchain and finance that is not one of the required readings for this course. Write


Find a peer reviewed article pertaining to blockchain and finance that is not one of the required readings for this course. Write a critical review of the article that is at least 3 pages long (content). Be sure to provide in-text citations when you paraphrase or directly quote from the article. Also include a reference page with an APA style citation of the article. Follow the writing requirements for this course when preparing the paper. Use the following format for the paper:

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4. Discuss the findings and conclusion(s) drawn by the article’s author.

5. Discuss the author’s point of view and assumptions. Indicate whether unsubstantiated assumptions were made and whether there is bias that exists in the article.

6. Discuss the significance of the article. Why it is important? On what do you base your assertions?

7. Conclude your paper. Summarize the important aspects of the review.

8. References

Your paper should include 8 centered and bolded headings that correspond to each of the required sections (Introduction, Article’s Purpose and Problem, Content, Article’s Findings and Conclusions, Point of View and Assumptions, Significance, Conclusion, References).

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Indent the first line of each new paragraph five spaces

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VikalPa • VolUMe 44 • iSSUe 1 • JanUaRY-MaRch 2019 1

Blockchain in Finance

Jayanth Rama Varma




Distributed Ledger


Crypto Currency

includes research articles
that focus on the analysis and
resolution of managerial and

academic issues based on
analytical and empirical or

case research

lockchain—the decentralized replicated ledger technology that underlies
Bitcoin and other cryptocurrencies—provides a potentially attractive alterna-
tive way to organize modern finance. Currently, the financial system depends

on a number of centralized trusted intermediaries: central counter parties (CCPs)
guarantee trades in exchanges; central securities depositories (CSDs) provide secu-
rities settlement; the Society for Worldwide Interbank Financial Telecommunication
(SWIFT) intermediates global transfer of money; CLS Bank handles the settlement
of foreign exchange transactions, a handful of banks dominate correspondent
banking, and an even smaller number provide custodial services to large invest-
ment institutions. Until a decade ago, it was commonly assumed that the finan-
cial strength and sound management of these central hubs ensured that they were
extremely unlikely to fail. More importantly, it was assumed that they were too big to
fail (TBTF), so that the government would step in and bail them out if they did fail.
The Global Financial Crisis of 2007–2008 shattered these assumptions as many large
banks in the most advanced economies of the world either failed or were very reluc-
tantly bailed out. The Eurozone Crisis of 2010–2012 stoked the fear that even rich
country sovereigns could potentially default on their obligations. Finally, repeated
instances of hacking of the computers of large financial institutions is another factor
that has destroyed trust. When trust in the central hubs of finance is being increas-
ingly questioned, decentralized systems like the blockchain that reduce the need for
such trust become attractive.

It is no coincidence that Bitcoin was launched shortly after the failure of Lehman
that marked the peak of the global financial crisis. Over the subsequent decade,
cryptocurrencies have grown rapidly: as of early November 2018, Bitcoin alone
had a market cap exceeding that of India’s most valuable listed company (and
Bitcoin was only around half the value of all cryptocurrencies). However, even a

The Journal for Decision Makers

44(1) 1–11, 2019
© 2019 Indian Institute of

Management, Ahmedabad
Reprints and permissions:

DOI: 10.1177/0256090919839897

2 Blockchain in Finance

decade after the launch of Bitcoin, we have seen only
a few pilot applications of blockchains to other parts
of finance. This is because cryptocurrencies (while
being extremely challenging technologically) encoun-
tered very few legal/commercial barriers, and could
therefore make quick progress after Bitcoin solved the
engineering problem. The blockchain has many other
potential finance applications—mainstream payment
and settlement, securities issuance, clearing and settle-
ment, derivatives and other financial instruments, trade
repositories, credit bureaus, corporate governance, and
many others. Blockchain applications in many of these
domains are already technologically feasible, and the
challenges are primarily legal, regulatory, institutional,
and commercial. It could take many years to overcome
these legal/commercial barriers, and mainstream
financial intermediaries could use this time window
to rebuild their lost trust quickly enough to stave off
the blockchain challenge. However, whether they are
successful in rebuilding the trust, or why will they be
disrupted by the new technology remains to be seen.


The blockchain is a decentralized, replicated, tamper
resistant (immutable), append-only ledger of trans-
actions (see Box 1A for a brief description of the
technology, and Box 1B for blockchain software and
implementation issues).

Box 1A. What Is the Blockchain?

Instead of relying on a central trusted institution to
maintain the authoritative record, the blockchain allows
all interested parties to maintain their own copy of the
ledger that is therefore decentralized and replicated.
Cryptographic integrity checks are used to ensure that
nobody is able to corrupt or tamper with their copy of the
ledger. This is needed because unlike a paper ledger where
any overwriting or alteration would be quite visible, digital
records can be edited without leaving any visible trails.

The blockchain ensures integrity by chaining blocks of
transactions together in such a way that altering any block
breaks the link with the next block. It is impossible to

change one block without changing the next block, which
in turn forces a change in the next and so on till the very
last block. This ensures that while new blocks can be added
at the end, older blocks remain immutable: the ledger
is append-only. The chaining of blocks is obviously not
physical, but is based on a cryptographic hash.

The hash is a digital fingerprint that uniquely identifies a
piece of text. For example, the SHA-1 hash of the Project
Gutenberg Full Text of The Complete Works of William
Shakespeare (which contains nearly a million words) is

If we edit the file and add a space at the beginning of
line 5,000, the hash changes to 5d960169ea490568abf

If instead, the first occurrence of ‘The’ in the file is changed
to ‘the’, the hash changes to 65a835f4845395c929d5076029c

It is evident that even tiny changes in a large file cause
major changes in the hash, making it suitable for use as a
digital fingerprint.

The mathematical properties of hashes that make it a good
digital fingerprint are discussed in standard cryptography
text books like Handbook of Applied Cryptography (Menezes,
van Oorschot, & Vanstone [1996]). The most important
properties are that (a) it is computationally infeasible to
find two distinct texts that have the same hash, and (b) that
given a specific hash-value, it is computationally infeasible
to find a text with that hash.

The blockchain is a set of blocks that have been chained
together with cryptgraphic hashes. Each block (except the
first) contains the hash of the previous block. If a crook alters
an old block, say block 1000, the blockchain would fail the
integrity check because the hash of block 1000 would no
longer match the hash stored in the next block (block 1001).
So the crook has to alter block 1001 so that the hash of the
previous block stored there matches the hash of the altered
block 1000. But this changes the hash of block 1001, and
so the crook has to correct the hash stored in block 1002.
This process goes on until the last block is reached. If all
participants in the blockchain keep track of the last block,

VikalPa • VolUMe 44 • iSSUe 1 • JanUaRY-MaRch 2019 3

they are indirectly guarding the integrity of the entire chain
even if it has grown to millions and billions of blocks.

While cryptgraphic integrity checks protect older blocks
from being altered, every blockchain needs rules (‘consensus
mechanisms’) that govern how new blocks are added at
the end. There are two main categories of blockchains—
permissioned and permissionless—that differ in terms
of their consensus mechanisms. Cryptocurrencies use
permissionless chains that are open to the whole world,
and in which there are no privileged participants with
special rights. Participants in these chains are also typically
anonymous (or more precisely, pseudonymous). Managing
consensus in these chains is a very difficult technical challenge
because no kind of majority rules can be implemented in an
environment where there is no list of voters and where it is
hard to prevent impersonation. Nakamoto used the idea of
proof-of-work to solve this problem:

The proof-of-work also solves the problem of determining
representation in majority decision-making. If the majority
were based on one-IP-address-one-vote, it could be
subverted by anyone able to allocate many IPs. Proof-of-
work is essentially one-CPU-one-vote. (See Nakamoto
[2008] for further details of how this works)

Most applications of the blockchain in mainstream finance
use a permissioned blockchain. First of all, only the
participants in the system are able to even read the data in
the blockchain. Second, not all of these participants might
have the privilege of adding new transactions to the chain.
Third the identity of participants is typically verifiable.
It is quite straightforward to implement consensus
mechanisms based on majority votes in these chains
because the voters are identifiable: usually a majority or
super-majority of privileged participants is required for
every new transaction.

For readers who want to understand blockchains in greater
detail, Chokshi, Dixon, Nazarov, Walden, and Yahya (2018)
provide a comprehensive list of resources and reading
material organized into various categories.

Box1B. Blockchain Software and Implementation

Almost all of the software used in blockchain applications
is open source and is actively maintained and developed.
However, most of these are designed to run on the Linux
operating systems, and the preferred way to run this

software on Windows machines is to use virtual machines
or Docker containers that provide a Linux environment in
which they can run. This is not a constraint for business
applications because financial service companies already
run a large number of Linux machines for other applications.

For permissioned blockchain applications, the most
common software platforms are Hyperledger Fabric, an
open source collaborative effort by a consortium of large
technology companies and banks, and R3 Corda, an
open source platform with a commercial version (Corda

While permissionless blockchains have found it
challenging to achieve high throughput because of the
inherent limitations of proof-of-work, the permissioned
systems have no difficulties on this score. Depository Trust
& Clearing Corporation (2018) report that during their
tests, distributed ledgers were able to ‘perform at levels
necessary to process an entire trading day’s volume at peak
rates, which equates to 115,000,000 daily trades, or 6,300
trades per second for five continuous hours’ (see also GFT
Technologies, 2018).

From an application point of view, the blockchain
provides the following features: First, decentralization
and replication means that a full audit trail is available
to all participants. Moreover, the inbuilt cryptographic
integrity checks ensure that this audit trail is verified by
all of them. The result is a significantly lower need for
trust in central hubs.

Second, the blockchain is partition resistant: if a few
nodes fail or are disconnected from the network, the
rest of the nodes can continue to function because they
all have a copy of all the data. In traditional finance,
on the other hand, if the central trusted institution is
temporarily down for any reason, the whole system
grinds to a halt. For example, on 20 October 2014, the
real time gross settlement system (RTGS) of the United
Kingdom experienced an outage of approximately nine
hours (Deloitte, 2014). Though all banks and other
entities were functioning, high-value payments could
not happen during this period. In its subsequent consul-
tation on building a new RTGS for the UK, the central
bank described the advantages of using a distributed
ledger: “the chief potential benefit when applied to
core settlement in an RTGS system is resilience” (Bank
of England, 2016).

4 Blockchain in Finance

The third benefit of the blockchain is Byzantine fault
tolerance. While partition resistance deals with nodes
that cease to function, Byzantine fault tolerance deals
with nodes that malfunction and function maliciously.
This has come to prominence with the rise of hacking
and cyber-attacks. While criminal gangs might be
content to steal money, terrorist group and nation state
adversaries might seek to inflict catastrophic damage
by corrupting or destroying data. The blockchain
provides strong defence against this attack because of
(a) replication of the data across large number of nodes
running on completely different computer networks
and (b) cryptographic integrity checks.

Fourth, the blockchain provides an excellent foundation
for smart contracts—contracts embedded in computer
code instead of legal language. By automating contract
negotiation and enforcement, smart contracts reduce
transaction costs and make small value transactions
economically viable. Smart contracts can achieve
efficiency gains by automating one or more of the key
contractual phases of search, negotiation, commitment,
performance, and adjudication (see Box 2).

Box 2. Smart Contracts

Nick Szabo coined the term smart contract two decades ago
when the internet was still in its infancy.

Smart contracts combine protocols with user interfaces
to formalize and secure relationships over computer
networks.…These protocols, running on public networks
such as the Internet, both challenge and enable us to
formalize and secure new kinds of relationships in this
new environment, just as contract law, business forms,
and accounting controls have long formalized and secured
business relationships in the paper-based world.…The
contractual phases of search, negotiation, commitment,
performance, and adjudication constitute the realm of
smart contracts. (Szabo, 1997)

It is possible to have smart contracts without the blockchain,
just as it is possible to have computer databases without the
blockchain. The problem in both cases is that of trust. Two
parties may use the blockchain because neither is willing
to trust the other to record the data faithfully. Similarly,
neither may be willing to let the smart contract software
run on the other’s computer. This is where the blockchain
helps: it is not only a shared database, but also a shared
computer. As Szabo puts it,

A block chain computer is a virtual computer, a computer
in the cloud, shared across many traditional computers and
protected by cryptography and consensus technology.…A
block-chain computer, in sharp contrast to a web server, is
shared across many such traditional computers controlled
by dozens to thousands of people. By its very design each
computer checks each other’s work, and thus a block chain
computer reliably and securely executes our instructions….
(Szabo, 2014)

A contract is a meeting of minds that was traditionally
reduced to long written documents in legal language.
However, many financial contracts are so complex that they
are better described by computer code than in natural/
legal language. In fact, many years ago, the US Securities
and Exchange Commission proposed to require that the
terms of most Asset Backed Securities be disclosed in
the form of computer code in the Python programming
language (Securities and Exchange Commission, 2010) so
that investors could understand them better.

Smart contracts can also facilitate the search and negotiation
phase of contracts. Many financial transactions are today
automated, but they depend on a trusted third party to
accomplish the automation. Stock trading is today done
largely by algorithms that decide to buy or sell based on
price signals and other publicly available information. A
momentum or trend following algorithm might send a
buy order to the stock exchange, while another contrarian
algorithm might send a sell order. The stock exchange’s
order matching software might match these orders based
on highly complex rules (e.g., the orders might have price
limits and might be partially hidden as well). A stock trade
can thus happen without any human intervention at all. But
this works only because of the stock exchange that stands
in the middle between the two algorithms. Smart contracts
running on a blockchain can achieve something similar in
over the counter (OTC) markets where there is no exchange
in the middle.

Smart contracts can also automate the performance of
contracts. In derivative contracts, for example, both the final
settlement and the daily mark to market are governed by
well-defined rules. With smart contracts, these transactions
can be fully automated. If there is no need for human
intervention, then the costs of these transactions comes
down, and it is feasible to have OTC contracts of much
smaller ticket sizes. The International Swaps and Derivatives
Association (ISDA), which governs most OTC derivatives,
has carried out a great deal of work on smart contracts.

VikalPa • VolUMe 44 • iSSUe 1 • JanUaRY-MaRch 2019 5

In a recent consultation paper (International Swaps and
Derivatives Association [ISDA], 2018), ISDA states:

Smart contracts could help revolutionize the
derivatives market by creating much-needed
efficiencies that would benefit the entire industry. But
transforming smart contracts from an exciting concept
to practical use will present a number of challenges.…
For smart derivatives contracts to fulfill their potential,
it is important they are developed in a way that is
compatible and consistent with the technological,
commercial, regulatory and legal standards applicable
to both derivatives contracts and smart contracts.
This will require knowledge and experience from
different disciplines and domains. Expertise in the
technology used, the commercial context of its use, the
regulation that applies to it and the law that supports
its effectiveness, are all critical.


As mentioned earlier, non-cryptocurrency applica-
tions of the blockchain have to overcome some major
legal/commercial barriers. First, unlike cryptocurren-
cies that exist only on the blockchain, in most other
applications, assets that exist in the real world (dollars,
rupees, securities, real estate) have to be represented by
entries in the blockchain. Cryptocurrencies do not need
any off-chain (real world) jurisprudence at all; they are
able to go beyond the pragmatic idea that code is law to
the more radical notion that only code is law. When we
try to move real world finance to the blockchain, code
and law have to co-exist. Some real world law has to
recognize code as law at least to some limited extent
so that transactions on the blockchain can effect change
of ownership in the real world. Today’s mainstream
financial institutions operate under similar legal protec-
tion going back to the 19th century. For example, in the
United Kingdom, the Bankers’ Books Evidence Act of
1879 provided, “Subject to the provisions of this Act, a
copy of any entry in a banker’s book shall in all legal
proceedings be received as prima facie evidence of such
entry, and of the matters, transactions, and accounts
therein recorded.” A similar law was passed in India
a decade later. Some law of this kind will be needed
to give legal sanctity to the blockchain for assets other
than cryptocurrencies.

Second, most blockchain applications in finance will
need to ensure regulatory compliance on day one.
Regulators are not often clear in their regulatory stance
on the new technology, and obtaining their clearance

is not always easy. By contrast, for a long time, crypto-
currencies could operate outside the regulatory frame-
work entirely. In recent years, this has begun to change
as many cryptocurrency exchanges have become
licensed money changers, and as traditional exchanges,
securities brokers, and asset managers have begun to
offer cryptocurrency related products. For example,
in the United States, Cboe Futures Exchange launched
Bitcoin futures in December 2017 after obtaining requi-
site regulatory approvals.

Third, many blockchain applications in finance have
to ensure commercial viability in the face of compe-
tition from incumbent players who are not only rich
and powerful, but also well entrenched in the current
legal and regulatory framework. Cryptocurrencies, on
the other hand, were (in the initial years) dominated
by ideologically motivated computer professionals
(‘geeks’) and anarchists who were not too constrained
by commercial considerations. By staying outside the
regulatory framework, they also avoided direct confron-
tation with incumbents defending their monopoly/
oligopoly. Only after establishing themselves outside
the formal system, did cryptocurrencies become more
mainstream and start attracting speculators seeking
quick returns.

For the blockchain to succeed in mainstream finance,
these critical hurdles will have to be overcome. The
blockchain ventures that we have seen so far have been
driven by either (a) venture capitalists funding poten-
tial disruptors in the hope of large rewards if they
succeed or (b) the incumbents themselves launching
pilot projects to protect themselves from being
disrupted. It remains to be seen whether these projects
will achieve sufficient scale and traction to challenge
today’s entrenched business models.


Since the blockchain is basically a technology for
recording transactions, it can potentially be applied to
most parts of finance. However, the following sections
describe applications that are most promising because
the current system is not working well enough, or
because blockchain pilots have been successful.

Fiat Money on the Blockchain

Finance is essentially about money, and much of the
financial system can run more easily on the blockchain

6 Blockchain in Finance

if fiat money (dollars, euros, and rupees) could be
transacted directly on the chain. There are many ways
of doing this, and it is reasonable to assume that one
or more of these mechanisms would achieve sufficient
liquidity and scale in the near future (see Box 3).

Box 3. Tokenization of Fiat Money

There are three main ways in which ordinary fiat money
(dollars or rupees) can be converted into tokens that live
on a blockchain. First, the central bank itself could issue
digital money that lives on a blockchain. Many central
banks around the world have been thinking about this, and
have discussed the matter in their reports and documents,
but none looks likely to take the plunge soon. The Bank for
International Settlements put it very tactfully: “the issuance
of a [Central bank digital currency] requires careful
consideration” (Bank for International Settlements, 2018).
Some market participants have been exploring the idea
of a temporary fiat money token that would be redeemed
and destroyed at the end of each day. The idea is that, for
example, a group of large European banks deposit a few
billion euros each with the European Central Bank (ECB)
before the markets open, and the ECB issues euro-coins of
equal value on the blockchain. During the day, the banks
can make euro payments to each other on the blockchain
using these euro-coins. At the end of the day’s trading, the
banks surrender their euro-coins to the ECB that redeems
them for euros. There may be less resistance to this idea,
but even this will be a bit of a leap into the unknown for the
central banks of the world.

Second, a large trusted institution could issue cryptocoins
fully convertible into fiat money with its promise backed
by a 100 per cent reserve of fiat money. The challenge is
to find a way for this institution to make money out of
this activity. When central banks issue money, they earn
seigniorage revenues because their money issuance does
not have to be backed by non-income earning assets.
Essentially, the central bank pays no interest on the
money that it issues, and is able to invest the proceeds in
government bonds that do earn interest. If the issuer of fiat
money tokens has to back the issuance with 100 per cent
reserves of highly liquid safe assets, the return earned on
these reserves might be limited. If the institution is subject
to banking regulations, it might be required to maintain

capital based on a leverage ratio. Until the issuance reaches
a sufficiently large scale (possibly billions of dollars), it
might not earn enough to cover its operational costs and
the return on its own capital. There is a coin called Tether
that claims to be backed 100 per cent with US dollars, but
there are questions about the trustworthiness of the issuer
(Griffin & Shams, 2018). In February 2019, one of the
largest banks in the world announced that it had created
and tested a digital coin representing the US dollar but its
usage is restricted to the bank’s large institutional clients
(Morgan, 2019).

Third, decentralized smart contracts can be used to create
a token that is pegged to a fiat currency. The Dai Stablecoin
(MakerDAO, n.d.) is pegged to the US dollar (1 Dai = 1
US dollar) through a smart collateralized debt contract.
Anybody can create new Dai coins by locking up sufficient
value of a cryptocurrency (ether) in a collateral contract.
For example, a person deposits $200 worth of ether into
a smart contract and issues 100 Dai (worth $100). At this
point, the contract is 200 per cent collateralized (the locked
up ether is worth 200% of the coins issued). The problem
is that as the value of the ether fluctuates, this excess
collateralization (the liquidation ratio) will also change. If
ether drops by more than 50 per cent, the Dai will no longer
be backed by adequate ether. To prevent this, the system
specifies a minimum degree of excess collateralizion.
Suppose the liquidation ratio is 150 per cent, and there is
drop of more than 25 per cent in the value of ether. The
value of the ether in the collateral contract will now be less
than the liquidation ratio, and the system sells the ether for
US dollars and uses the proceeds to buy back the 100 Dai
that were issued. After deducting a liquidation penalty, the
remaining collateral is returned to the original creator. In
a decentralized system, the question is who will perform
the liquidation, and the answer is that the sale of ether and
the buyback of Dai will both be done by smart contracts.
Any person can initiate the process of liquidation and earn
a small reward for doing this. It is expected that people
will set up smart contracts to monitor all the Dai collateral
contracts in real time and trigger liquidation as needed.
Of course, the creator of the contract can also choose to
top up the collateral to avoid the liquidation penalty. The
risk to the Dai-Dollar peg is that ether falls so sharply and
quickly that in the time between initiation and completion
of the liquidation, the value of the collateral drops below

VikalPa • VolUMe 44 • iSSUe 1 • JanUaRY-MaRch 2019 7

the required 100 dollars. This risk can be reduced by high
liquidation ratios. The Dai Stablecoin is backed by further
lines of defence designed to minimize the risk of the peg
being broken. Details are available in the Dai Stablecoin
whitepaper (MakerDAO, n.d.). Again, the issue is whether
the economics will work well enough to motivate adequate
creation of Dai, particularly when the MakerDAO platform
on which the system runs wants to appropriate significant
seigniorage income for itself. The creator can sell the Dai
for dollars and earn interest on these dollars, but her ether
becomes a dead asset locked up in a collateral account.
Locking up ether might not matter much when credit
and money

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