The Science of Finance

Blockchains and Derivatives Markets 

Brad Levy 

U.S. Commodity Futures Trading Commission, Technology Advisory Committee 

Washington D.C. 

February 23, 2016
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Blockchains and Derivatives Markets 

• “Blockchain technology”: what’s important

• Implications for derivatives markets 

• Path to adoption 
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Blockchains: Three Key Components 

Blockchains and the 

peer-to-peer networks 

that create them provide 

financial markets with an 

alternative model for 

securing and maintaining 

derivatives contracts 

Natively digital assets 

Digital assets, like bitcoin, are not representations of 

paper assets; they are the asset. Digitization establishes 

a single record of custody, traceable over time

True smart contracts 

The aggregate processing power of every network 

participant allows contract governance to rely on a 

shared protocol, not a third party 

A network’s ability to maintain contract terms and the 

obligations that underlie those terms yields a selfservice data warehouse 

Shared data repositories 
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Implications for Derivatives Markets 

Blockchain technology addresses risks and their associated costs 

Step 1: Operational Risk 

Digitization of assets & agreements

• Digital representations of paper assets 

• Natively digital assets 

• Digital contracts Optimization of collateral

Step 2: Balance Sheet Risk 

• Minimize cost to transact assets 

• Minimize cost to maintain obligations 

• Minimize cost to secure networks Securitization of financial products 

• Deliver cross-asset market transparency 

• Change risk profile of complex financial products 

• Promote market liquidity 

Step 3: Market Risk 
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Path to Adoption 

Next steps to adoption – Collaboration is key 

Network Costs 

Explicit costs: are blockchains always and 

everywhere more cost effective than third parties? 

Implicit costs: how do blockchains decrease costs in 

other areas, such a operations and reporting? 

Cost of Trust: can blockchains price trust amongst 

market participants? 

Identity Management 

Identify: market participants must be fully compliant 

and easily located in a peer-to-peer network 

Verify: market participants must be able to 

demonstrate legal standing with other peers 

Authorize: market participants should be entitled to 

transact based on their ability to perform the above 

Regulation and Compliance 

Objectives-focused regulation: regulation can guide 

and promote industry-wide blockchain adoption 

Role of TAC: industry leadership and consensusbuilding specifically around derivatives

FCA Regulatory Sandbox: a blueprint for a supportive 

and collaborative approach to fintech regulation 

Markit’s work to date

Smart derivatives contracts ∙ Syndicated loans ∙ FX ∙ Digital assets ∙ KYC/AML 
mines data 

pools intelligence 

surfaces information 

enables transparency 

builds platforms 

provides access 

scales volume 

extends networks 

& transforms business. 
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