The Too-Big-To-Fail Problem and the Blockchain Solution

50 Pages Posted: 28 Aug 2020

See all articles by Michael Schillig

Michael Schillig

King's College London - The Dickson Poon School of Law

Date Written: August 25, 2020

Abstract

The paper seeks to ascertain whether and to what extent blockchain technology may contribute to solving the politically and socially intractable problems of effectively resolving distressed TBTF financial institutions. It revisits the TBTF problem in the light of the Global Financial Crisis and the COVID-19 crisis and provides an overview of the constantly evolving DLT/blockchain ecosystem. It further seeks to address the main arguments commonly advanced by blockchain sceptics/opponents against the more widespread adoption of crypto-assets. Given blockchain’s capacity for decentralization, transparency and automation, the technology seems particularly well suited for tackling TBTF. On that basis, the paper discusses the potential impact of blockchain technology on (TBTF) bank resolution in three possible scenarios. Gradual adoption over the next five years may significantly improve the resolution process primarily through enhanced transparency of the blockchain-recorded history of assets and transactions. Over the next decade, a ‘smart securities world’ may emerge where bail-in could be automated and systemically important assets and liabilities resolved through distributed financial market infrastructures (dFMIs). The final scenario, with a 20-year horizon, is a fiat cryptocurrency in a reformed financial system where banking panics are eradicated. These scenarios are speculation. However, the basic technological building blocks are already available today and with improved scalability, more reliable smart contract execution and widespread adoption over time they could help to significantly improve the resolvability of TBTF institutions.

Keywords: Blockchain, bail-in, smart contracts, TBTF, cryptocurrency

JEL Classification: K

Suggested Citation

Schillig, Michael, The Too-Big-To-Fail Problem and the Blockchain Solution (August 25, 2020). King's College London Law School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3680759 or http://dx.doi.org/10.2139/ssrn.3680759

Michael Schillig (Contact Author)

King's College London - The Dickson Poon School of Law ( email )

Somerset House East Wing
Strand
London, WC2R 2LS
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
62
Abstract Views
517
rank
388,794
PlumX Metrics