INTRODUCTION Financial transactions are foundational

Financial Transactions

Financial transactions are foundational to the national and global economy. The global

financial systems transact trillions of dollars daily and serve billions of customers (Tapscott &

Tapscott, 2016). Taking the USA as an example, the Automated Clearing House system

processes more than forty trillion dollars’ worth of annual transactions—and that only represents

about 20 percent of the electronic payments in the nation (Kiviat, 2015). With many competitors

seeking a share of this huge market, to remain competitively efficient, financial institutions must

frequently disrupt their operations and processes driven by new technologies such as blockchain

(PwC, 2017).

Workie and Jain (2017) distinguish three phases of a blockchain-based financial

transaction: 1) the initiation phase, where a client accesses the blockchain network to buy or sell

financial assets, 2) the verification of financial assets in the blockchain ledger by involved

stakeholders, and 3) the recording of the information into the blockchain ledger. In alignment

with these three phases, this dissertation focuses on four areas of financial transactions: asset

verification, record keeping, data privacy, and transaction costs. Table 1 illustrates the mapping

between the four areas of dissertation focus and the three phases of a blockchain-based financial

transaction. Asset verification and record keeping map directly to the first and second phases

respectively. However, users and financial institutions are concerned about data privacy and

transaction costs during all phases of financial transactions. To cover the four areas of focus

methodically, the dissertation explores the opportunities, challenges, and recommendations from

technological, regulatory and adoption perspectives.

Table 1: Financial Transaction Phases and Areas of Research Focus

F T P

A of Resear Focus

Transaction initiation

Data privacy

Overall

transaction cost

Verification of asset

Asset verification

Data privacy

Recording information

Record keeping

Data privacy

At present, financial transaction costs involve many layers of fees that are collected by

intermediaries. Digital payments and currency transfers require heavy consumption of human

and infrastructural assets of financial institutions that act as intermediaries to conduct, clear, and

settle transactions (Yli-Huumo, Ko, Choi, Park, & Smolander, 2016). Transaction fees are

significant—McKinsey states that the global payment industry enjoyed a 1.8 trillion dollar

revenue in 2015 (Bansal, Bruno, Istace, & Niederkorn, 2016). Moreover, it takes several days to

settle transactions—transactions such as money transfers require nearly three days to settle (Guo

& Liang, 2016; Kiviat, 2015). Although profitable to the intermediaries, these costs burden the

parties making the transaction. Blockchain technology might make these transactions faster and

less costly by eliminating several layers of intermediaries. The decentralized nature of

blockchain could imply costly layers of redundancy, infrastructural costs, and delays.

Nonetheless, the reverse could be true because the technology could provide its own

costefficiencies—as will be described later. Efficiencies could be gained in the same way that

double-entry accounting has improved security and reliability despite its redundancy, and

analogous to how computer technology has improved security and reliability—until cyber risks

evolved. Blockchain technology could, therefore, be the next step in security and reliability.

Nonetheless, many challenges and issues would need to be resolved before getting there.

I.2 Blockchain Technology

Blockchain technology was introduced by Nakamoto (2008) to bypass middleman actors

such as financial institutions by allowing direct peer-to-peer transactions. To achieve this goal,

Nakamoto suggested a peer-to-peer distributed ledger. In this way, payer and payee can exchange

directly over the network, utilizing encryption and consensus mechanisms (Guo & Liang, 2016;

Tsai, Blower, Zhu, & Yu, 2016; Zhu & Zhou, 2016) to make transactions tamperproof since any

modification to the historical data record is detectable by participating blockchain network nodes

(B. Lee & Lee, 2017; Tapscott & Tapscott, 2017).

One of the fundamental objectives of any payment system is to guard against double

spending. In other words, the system should be able to track who owns the money and should

only allow the person who owns the money to spend it once and not more than once. Blockchain

technology solves the double spending issue through a consensus mechanism (Nakamoto, 2008;

Pazaitis, De Filippi, & Kostakis) that will be detailed later in this dissertation.

Blockchain technology comprises several technological and non-technological concepts

and ideas. The integration of these concepts and ideas allows value exchanges without a trusted

central institution (Kiviat, 2015). As a result, there is a growing interest in the technology

because it provides security, anonymity, and data integrity without third-party organizations in

control of the transactions (Yli-Huumo et al., 2016). Although it could theoretically

disintermediate, in reality, blockchain networks re-intermediate trust away from the center

(Mougayar, 2016) and form ‘multi-center, weakly intermediated’ schemes (Guo & Liang, 2016).

The decentralized nature of blockchain technology could also make the data more transparent

when compared to centralized transactions (Yli-Huumo et al., 2016). However, since public

blockchain network users could opt to act anonymously, a high level of privacy could diminish

the degree of transparency from the perspective of entities that need to know more about end

users.

Initially, blockchain technology emerged as the underpinning platform for the Bitcoin

cryptocurrency. However, for the reasons outlined, banks expect it will help them streamline and

reduce the costs of activities such as international payments and trading settlement (Irrera &

Shumaker, 2017). This expectation opens the door for a potentially disruptive technology that

could have broad implications for the financial sector. Zhao, Fan, and Yan (2016) and Mougayar

(2016) predict that the transformational effect of blockchain technology on enabling trustworthy

transactions globally will parallel the paradigmatic influence of the Internet on accessibility to

information. Zhao et al. (2016) further elaborate that decentralized trust—arising from

blockchain technology—will attenuate costs of transactions that are due to non-technical aspects

of centralization. Similarly, Guo and Liang (2016) posit that applying blockchain technology can

resolve many of the efficiency bottlenecks, delays, fraud, and operational risks they assert infest

the financial industry. Nonetheless, blockchain networks are inherently slow since 1) getting a

whole network to a consensus on a single truth is time-consuming and 2) peer-to-peer nodes

have to act both as a client and a server (Tsai et al., 2016).

I.3 State of Adoption

Since blockchain technology could offer opportunities to reduce cost and improve the

speed of transaction settlements, exchanges, banks, and the whole securities industry are

increasingly interested in the technology (de Meijer, 2016). Moreover, international institutions

including the International Monetary Fund, and nations, such as the USA, the UK, Japan, China,

Russia, India, and South Africa have initiated research on blockchain technology applications

targeting many fields (Guo & Liang, 2016).

Recently, international institutions, including the United Nations and the International

Monetary Fund (Guo & Liang, 2016), as well as central banks in the U.K., China, the USA,

Korea, Singapore, Japan, Russia, India, Netherlands, and South Africa have recently announced

blockchain technology plans (Mori, 2016; Tsai et al., 2016). National stock exchanges such as

Nasdaq; banking titans such as J.P. Morgan; and financial bodies such as the USA Depository

Trust & Clearing Corporation and the People’s Bank of China have all started their blockchain

technology research laboratories (Guo & Liang, 2016; Mori, 2016). Most financial institutions

have pilot programs for blockchain technology. For instance, R3—founded in 2015 as a

blockchain technology consortium—has partnered with over eighty financial institutions and

bodies (R3, n.d.). China Financial Blockchain Consortium (Guo & Liang, 2016) is another

alliance. Traditional companies have jumped on the blockchain technology bandwagon with a

variety of offerings. For instance, IBM has built a supply chain blockchain with a mission

statement to lubricate exchange, enhance trust, increase accountability, and elevate transparency.

IBM CEO Ginni Rometty stated: “What the Internet did for communications, blockchain will do

for trusted transactions” (IBM, n.d.). Startups such as Blockstream and Digital Asset Holdings

already offer financial institutions services that facilitate digital asset dealing (Pilkington, 2015).

According to Coindesk (2017a), enterprise-oriented blockchain-based projects grew in size, and

pilot projects continued in partnership with major groups and corporations as summarized in

Table 2.

Table 2: State of Enterprise Blockchain Technology (Coindesk, 2017a)

Hyperledger expands projects and

members:

4 top level frameworks including EVM

code, 130 members, PoCs in finance, and

working groups in healthcare

Enterprise Ethereum Alliance is born:

EEA launches with major membership list,

focused on permissioned Ethereum with

interoperability with public blockchains

Corporates expand staffing, R&D labs:

Enterprises, consortia, and working groups

continue launching pilots, PoCs and tests

Ripple expands to Japan, completes pilot:

Mitsubishi joins board, 47 bank consortia

implements cloud-based payment pilot

R3 continues diverse tests:

Demos Ethereum applications, and

commercial paper programs

DTCC (Depository Trust & Clearing

Corporation) expands DLT settlement

trials:

Eying REPO market, working with startups

including Digital Asset and R3

I.4 Research Approach

Even though blockchain technology could impact many aspects of our lives, thus far,

there are only a few published academic papers that treat the technology from a business

perspective. aver Research on blockchain technology has been mainly attentive to technical and

legal topics (Lindman, Tuunainen, & Rossi, 2017) primarily published in practitioner-oriented

journals and on websites that are targeting Bitcoin evangelists and hobbyists. Over 80 percent of

the extant literature focuses on Bitcoin systems, and less than 20 percent deals with other

blockchain technology applications (Yli-Huumo et al., 2016) with most of that focused on

technological (Beck, Czepluch, Lollike, & Malone, 2016; Lindman et al., 2017; Teigland, Yetis,

& Larsson, 2013) and legal problems (Bollen, 2013; Ingram & Morisse, 2016; Lindman et al.,

2017). Hence, as blockchain technology permeates, further research in the domains of

information systems (IS) and management is called for (Giaglis & Kypriotaki, 2014; Lindman et

al., 2017; Van Alstyne, 2014). This dissertation contributes to the efforts of bridging this gap in

knowledge.

To explore the impact of blockchain technology on financial transactions, this dissertation

uses a pluralistic method that combines a review of the literature, an analysis of the perspectives

of key industry players and observers, and a theoretical interpretation through the lens of

transaction cost theory (Coase, 1937; Ouchi, 1980; Williamson, 1975). A pluralist approach that

compares and contrasts multiple plausible perspectives on reality is crucial to the emergence of

rigorous scientific knowledge (Azevedo, 1997; Van de Ven, 2007) as it can provide

complementary insights and possible synthesis of them to study an emerging business

phenomenon. Furthermore, using multiple perspectives on a complex business problem

decreases the likelihood of unintended bias in interpretations (Van de Ven, 2007).

When utilizing a pluralist methodology, the researcher moves iteratively between data

and theory (A. S. Lee & Baskerville, 2003) contrasting perspectives and synthesizing findings

into a holistic account. Consistent with the approach, this dissertation moves between description

and theory by drawing on a) the intersection of literature about blockchain technology and

financial transactions, b) interviews with financial industry executives and subject matter experts

about the impact of blockchain technology on financial transactions, and c) transaction cost

theory (Coase, 1937; Ouchi, 1980; Williamson, 1975) as a particularly thought-provoking

theoretical framework that promises insights into the potentially disruptive effects of the

technology. When applying the first and second methods, we adopt a broad view of the

phenomenon exploring various types of blockchain technology impacts on financial transactions.

In this way, we report findings such as technical, regulatory, and adoption issues. Moreover, in

this case, the term ‘transaction cost’ has a broader meaning to engulf ‘transaction theory’ costs,

production costs (Dyer, 1997; Zajac & Olsen, 1993), and transition costs that are related to

deploying blockchain technology. Nevertheless, when we look through the prism of transaction

cost theory, we zoom in to solely focus on ‘transaction theory’ costs.

A detailed account of how the dissertation has applied the pluralist methodology is found

in appendix A.

I.5 The Role of Theory

The field of IS is concerned with studying phenomena that emerge from the interaction

between technological systems and social systems (Gregor, 2006; A. S. Lee, 2001). As such, the

use of blockchain technology in any industry satisfies the definition of IS and could be explored

targeting the four central goals of IS theory (Gregor, 2006). The second goal is to explain how,

why, and when things occur based on causality and methods of argumentation (Gregor, 2006).

The third goal is to probabilistically predict what will transpire in the future if certain

preconditions obtain (Gregor, 2006). Finally, the fourth goal is future-oriented like prediction

with theory offering a prescription of normative methods and structures for the development of

artifacts to attain desired outcomes (Gregor, 2006).

This dissertation provides descriptive accounts and examines opportunities and risks from

business and societal perspectives (Lindman et al., 2017) to uncover new explanations

underlying the blockchain technology phenomenon by invoking transaction cost theory to

explicate the interaction of the financial sector with blockchain technology (Gregor, 2006). In

part, the goal here is a response to the assessment of Zhao et al. (2016) that research in the

economic and social validity of blockchain technology applications is lagging because it takes

more effort to uncover. Additionally, there is a lack of a deep understanding regarding how

blockchain technology decentralized services are designed, developed, and organized to

revolutionize trust (Lindman et al., 2017). In addition, this research seeks to foresee (Gregor,

2006) the impact of blockchain technology on financial transactions by enlisting perceptions by

key industry players and observers and by adopting theoretical interpretations. Hence, the final

integrative goal of this research is to prescriptively (Gregor, 2006) outline insights into how

financial organizations can prepare for blockchain technology opportunities and threats.

The transaction cost theory is a fitting theoretical framework for understanding and

explicating the impact of blockchain technology on financial transactions because blockchains

could impact how transactions are conducted. Transaction cost theory is interdisciplinary by

virtue of joining economic perspectives with aspects of organization theory and contract law

(Williamson, 1979). The theory is concerned with minimizing the cost of transactional activities

that are not directly attributed to the production of goods and services, and are instead related to

the cost of searching, bargaining, monitoring, and enforcement activities that are associated with

the transaction of goods and services (Husted & Folger, 2004). Consequently, a persistent goal of

transaction cost theory is concerned with organizational boundaries around the decision of

whether a transaction is more efficiently performed within a firm or outside a firm’s boundaries

(Coase, 1937; Geyskens, Steenkamp, & Kumar, 2006).

Ouchi (1980) defines a ‘transaction cost’ as any activity that is conducted to satisfy the

expectations of participants in an exchange. Usually such costs are attributed to the difficulty of

redeploying assets to their next best use—the asset specificity challenge (Husted & Folger, 2004;

Klein, Crawford, & Alchian, 1978; Williamson, 1985, 1991)—or to the difficulties in measuring

individual contributions to team effort—the metering problem which is also referred to as

performance ambiguity (Alchian & Demsetz, 1972; Husted & Folger, 2004; Milgrom & Roberts,

1992; Ouchi, 1980). Another problem with perceiving equity is contingent goal incongruence—

the degree to which exchange participants have incompatible objectives (Husted & Folger, 2004;

Ouchi, 1980).

There are two primitives in transaction cost theory that are closely related to the

aforementioned notions. First, bounded rationality—the individual’s limitation on receiving,

sustaining, retrieving, and processing information (Simon, 1955; Williamson, 1973). The second

is opportunism—exemplified by dodging duties, breaching agreements, and stealing (Alchian &

Demsetz, 1972; Husted & Folger, 2004) as each participant endeavors to maximize their

advantages in transactions through dishonesty and lack of transparency (Williamson, 1973).

Moreover, Williamson also specific two more transaction costs determinants: frequency,

meaning how often a contract is invoked (Milgrom & Roberts, 1992; Williamson, 1979) and

uncertainty, comprising ex ante difficulties of anticipating all future scenarios, language

equivocality, and ex post performance ambiguity.

Accordingly, Table 3 summarizes the research design for this dissertation based on

Mathiassen (2017). The table defines the problem setting, the area of concern, the analytical

framing, the method, the research question, and the expected contribution to the body of

knowledge.

Table 3: Research Design Summary—Adapted from Mathiassen (2017)

The problem setting

represents people’s concerns

in a real-world problematic

situation.

Blockchain technology could offer opportunities

concerning financial transactions. On the other

hand, to implement blockchain technology there

are many technological, regulatory, and

adoption challenges.

The area of concern

represents a body of

knowledge within the

literature that relates to the

problem setting.

The impact of blockchain technology on

financial transactions with specific focus on

asset verification, record keeping, data privacy,

and transaction costs

The conceptual framing helps

structuring the analysis of data

to answer the research

question. FA draws on

concepts from the areas of

concern, whereas FI is

independent of area of

concern.

The study will leverage transaction cost theory

as an independent conceptual framing FI.

The adopted methods of

empirical inquiry.

The study adopts a pluralist approach by

combining three different methods of inquiry:

Method 1: Extant literature analysis. Method

2: Perception analysis based on interviews

with financial executives, subject matter

experts, and blockchain technology

researchers.

Method 3: Theoretical interpretation of insights

from Methods 1 and 2 based on transaction cost

theory.

The research question relates

to the problem setting; it

opens the research into the

area of concern and helps

ensure the research design is

coherent and consistent.

What is the impact of blockchain technology on

financial transactions?

The contributions to the

problem setting and area of

concern and possibly to

conceptual framework and

method.

This study contributes to the existing body of

knowledge as follows:

Contribution to practitioners: Insights into how

financial organizations can prepare for

blockchain technology opportunities and threats

CP.

Contribution to the literature: A synthesis of the

extant financial literature related to blockchain

technology, coupled with empirical accounts of

industry perceptions of the impact of

blockchain technology CA on financial

transactions.

Contribution to the theory: A theoretical

interpretation of the phenomenon through the

lens of transaction cost theory CF.

II TECHNOLOGY: BLOCKCHAINS

Blockchain technology is both an economic innovation—a new architecture for enabling

humans or machines exchanges without the need of full trust—and a technological innovation—

a novel decentralized ledger that engenders trust (Liebenau & Elaluf-Calderwood, 2016;

Lindman et al., 2017) because the technology could provide the platform to record transactions

and share data between participating parties in a more efficient, transparent, and verifiable

manner (Workie & Jain, 2017). However, disruptive innovations usually surpass the internal

absorption and usurpation capabilities of established institutions (Mougayar, 2016) and both

established institutions and startups will have to navigate the regulatory and adoption turbulences

and technological hurdles as will be detailed later in this dissertation.

II.1 Blockchain Explained

To explain how blockchain technology works, we start with a simple scenario based on

Bitcoin blockchain. In our scenario, Alice wants to use some of her Bitcoins to buy an audible

book from Bob through the Bitcoin blockchain—Figure 1.

Figure 1: A Simplified Blockchain-based Transaction

Alice initiates the exchange by sending a broadcast message to the blockchain network.

The message contains the electronic address of Bob and the amount required to pay for the

audiobook. Next, the blockchain network assembles Alice’s transaction information and adds it

to its public ledger. Then, seeing the payment from Alice, Bob sends Alice the electronic keys to

Bitcoin Blockchian

Network

Alice has some

Bitcoins and wants

to buy an audible

book

Bob sells

audible books

download the audible book. Based on this scenario, we present the underpinning blockchain

concepts that explain how the transaction in the scenario works.

To support the ensuing elaboration of the above scenario, we describe in Table 4 the

relevant Bitcoin blockchain terms.

Table 4: Bitcoin Blockchain Terms

Transaction

According to (BitcoinWiki, n.d.) a Bitcoin transaction is

1. A transfer of value that is broadcasted to the network and

recorded by the network into a block.

2. Typically references previous transaction outputs as new

transaction inputs and dedicates all input Bitcoin values to new

outputs.

3. Not encrypted, so it is possible to browse and view every

transaction ever recorded into a block.

4. Once buried under enough confirmations it can be considered

irreversible.

Block

A unit of data in the blockchain that includes a hash of itself, the hash

of the prior block, and multiple transactions (Narayanan, Bonneau,

Felten, Miller, & Goldfeder, 2016).

Bitcoin blockchain reached 510188 blocks as of 2018 Feb 20th

(Blockchain, n.d.).

Blockchain

Is a chain of blocks where each block is cryptographically linked to

the prior one (Mattila, 2016).

Blockchain

Network

A peer-to-peer arbitrarily connected network with no hierarchy, no

centralization, and no master nodes; where each full node stores a

replica of the blockchain and relays info to its connected neighbors

(Narayanan et al., 2016).

Node

Any computer that connects to the Bitcoin network (BitcoinWiki,

n.d.).

Full node

A special type of node that fully validates transactions and blocks;

almost all full nodes also support the network by accepting

transactions and blocks from other full nodes, validating those

transactions and blocks, and then further relaying them to neighboring

nodes (BitcoinCore, n.d.).

The number of full nodes is unknown. (Bitnodes, 2018) asserts that

there are 11389 reachable full nodes as of 2018 Feb 20th, but

estimates by different sources vary significantly.

Miner

A full node that competes to build the next block (Tapscott &

Tapscott, 2016).

Estimates vary, but they are thousands Bitcoin miners.

II.2 Authentication

How does the Bitcoin blockchain network and Bob know that Alice authenticated the

transaction? The answer is digital signature. Alice initiates the transaction by using her private

key—a password that only Alice knows—to digitally sign, and therefore, authenticate the

transaction. Paralleling the objectives of a traditional hand-written signature, a digital signature

is a cryptographic mechanism that utilizes pairs of private and public keys to satisfy four

objectives (Badev & Chen, 2014). First, only the signatory can sign with her specific signature.

Second, it is not possible to append the signature to other than the signed documents. Third, the

signatory cannot deny her signature. Fourth, the recipient can validate that the document has the

authentic signature of the signatory. Narayanan et al. (2016) explain how the public and private

keys are generated using a mathematical algorithm such that if Alice signs a message with her

private key, and Bob knows her public key, then Bob can verify that Alice has indeed signed the

message and that the message has not been tampered with. Figure 2 depicts this authentication

scenario.

Figure

2: Authentication Using Digital Signature—Adapted from Badev and Chen (2014)

II.3 Content and Verification

What is in the transaction initiated by Alice? Narayanan et al. (2016) explain how

transactions are constructed in a Bitcoin blockchain network, in the scenario where Alice intends

to send some Bitcoins to Bob. The transaction comprises a pointer to where Alice acquired the

Bitcoins in the historical record of the blockchain, the amount she wants to transfer to Bob, the

public key of Bob which is the payee's digital address, Alice’s digital signature for the whole

transaction, and a small transaction fee as an optional incentive for the node that assembles her

transaction. Figure 3 illustrates the content of the transaction broadcasted by Alice to the

blockchain network.

Upon receiving Alice’s transaction, the blockchain network verifies a few items such as

Alice’s digital signature and her claim of ownership of the Bitcoins. Following the verification of

the veracity of the transaction, one of the nodes in the blockchain network assembles Alice’s

transaction into a block of data alongside hundreds of other transactions, and hence, the block

becomes part of the chain or ledger. The network is now aware that the Bitcoins spent by Alice

nder Sig

s message

using own private key

Recipient verifies signature

using sender’s public key

Figure

are owned by Bob. By virtue of Alice’s transaction being part of the public ledger, Bob may

confidently send Alice the keys to the audiobook she bought from him.

3: Transaction from Alice to Bob—Adapted from Narayanan et al. (2016)

Input: Pointers to where Alice acquired the Bitcoins

Output 1: Bitcoins to be transferred to Bob and his public key

Output 2: Change address—Alice’s public key and change amount

Signature: Alice’s digital signature of the whole transaction

Notes:

• The total of inputs should be equal or greater than the total of outputs

• When total of inputs is greater than total of outputs, the difference is considered as a

transaction fee

II.4 Network Operation

How does the Bitcoin blockchain network operate? Our scenario is based on the Bitcoin

blockchain network. Figure 4 depicts the steps of our scenario in more details.

Figure 4: Alice Transacting with Bob through Blockchain Network

Figure

To contrast and, therefore, appreciate the simplification blockchain technology brings to

the table, Figure 5 depicts a traditional credit card transaction.

5: A Traditional Credit Card Transaction (MasterCard, n.d.)

Bitcoin is a cryptocurrency operating over a public blockchain network. According to

Narayanan et al. (2016), the Bitcoin blockchain network comprises many nodes that are

arbitrarily and partially connected to relay information to each other using the blockchain

protocol. The Bitcoin blockchain network is a peer-to-peer network that has no hierarchy, no

centralization, and no master nodes.

Some full nodes participate in the tasks of validating and relaying transactions in the

Customer buys a good using

credit card

Merchant’s point

sale

sends customer’s information

to the acqu

irer

Acquirer asks MasterCard to

get authorization from the

customer’s bank

MasterCard submits the

transaction to the bank for

authorization

The bank authorizes and

responds to the merchant

The bank routes the

payment to the acquirer

Acquirer deposits the

payment into the merchant’s

account

Figure

Bitcoin blockchain network (Swan, 2015). Such full nodes are called ‘miners’—a metaphor for

their quest to compete with each other to build new blocks. Since the Bitcoin protocol allows full

nodes to share their knowledge about transactions with their neighbors, the network guards

against double-spending by validating each new transaction against the list of unspent

transactions in the ledger (Bjerg, 2016). ‘Miners’ are motivated by two monetary incentives

described by Narayanan et al. (2016). First, each new valid block conceives a set amount of new

bitcoins that will belong to the builder of that block. Second, the block builder collects the

transaction fees of all the transactions included in the block.

Narayanan et al. (2016) go on to explain this operation of a blockchain network. Before a

‘miner’ builds a new block, she must find a solution for a hard-to-solve mathematical puzzle.

This endeavor is referred to as proof of work since it requires spending a significant amount of

computational power to solve the puzzle. That is the reason, on average, it takes nine minutes to

generate a new block in the Bitcoin blockchain network. Next, other ‘miners’ verify the integrity

of the newly-built block and append it to the longest chain. The longest valid chain is considered

the operational blockchain that the network nodes honor and extend. Honoring and extending the

longest valid chain is another significant component of the consensus mechanism that allows the

network to function without a central authority.

II.5 Chain of Blocks

How are blocks structured? From a database perspective, the blockchain is a series of data

blocks that are cryptographically chained together (Mattila, 2016) as each block contains the

‘hash’—a unique short encryption of the message—of the preceding block, and therefore, it is a

chain of blocks or a 'blockchain'. A hash function produces an easy to compute, but extremely

hard to invert fixed-length compact ‘hash’ from a message of arbitrary length (Gilbert &

Handschuh, 2003). Figure 6 illustrates a high-level schematic of a blockchain ledger or database.

Since the header of the block contains a ‘hash’ of the data of the current block, and the current

block contains the hash from the previous block, back to the genesis block, the history of every

past block predicates the latest block. The ‘hash-chaining’ of blocks makes it extremely difficult

to hack a blockchain—as we mentioned earlier, it is hard to solve the mathematical puzzle for a

single block, let alone to work backward to rebuild many blocks that satisfy the required

solutions.

Figure 6: Chain of Blocks in a Bitcoin Blockchain (Narayanan et al., 2016)

Each Bitcoin block is a collection of transactions in the range of 2000 transactions per

block. Figure 7 depicts a simplified representation of the Bitcoin blockchain ledger.

Figure 7: Simplified Blocks of Transaction(Narayanan et al., 2016)

II.6 Blockchain Categories

This dissertation adopts the definition of blockchain by Mougayar (2016) as “a

technology that permanently records transactions in a way that cannot be later erased but can

only be sequentially updated, in essence keeping a never-ending historical trail.” As such,

immutability is the defining attribute of blockchains. Therefore, except for immutability, which

must be present in every blockchain, the rest of the attributes exist at varying degrees (Coletti,

Hash of block 81

Data

Block 82

Hash of block 82

Hash of block 80

Data

Block 81

Hash of block 81

Hash of block 79

Data

Block 80

Hash of block 80

Transaction

T of A



Hash of block 81

Transaction

Block 82

Hash of block 82

Transaction

Hash of block 80

Transaction

Block 81

Hash of block 81

Transaction

Hash of block 79

Transaction

Block 80

Hash of block 80

2015; DeRose, 2015; Pilkington, 2015). The key attributes of blockchain technology are

distributed ledgers, cryptography, consensus mechanisms, and peer-to-peer transmission (Guo &

Liang, 2016; Tsai et al., 2016). It is, therefore, a meta-technology that integrates several

technologies to form a gestalt—greater than the sum of its parts (Mougayar, 2016).

There are different flavors of blockchains with diverse sets of attributes (Pilkington,

2015) and varying levels of control that define categories of blockchains. Table 5 illustrates a

typological distinction between the main categories. These different categories provide flexible

trust-based services (Lindman et al., 2017) as will be further elaborated later. Each blockchain is

a standalone database with varying levels of access and control. Public blockchains are

unconditionally accessible by every Internet user (Buterin, 2015; Pilkington, 2015). At the other

end of the spectrum, access to an entirely private blockchain is controlled by a central locus of

governance (Buterin, 2015; Pilkington, 2015). In between the public and private dichotomy, there

is a continuum (Allison, 2015; Brown, 2014; Pilkington, 2015) of permissioned, hybrid, or

partially decentralized blockchains (Buterin, 2015; Pilkington, 2015).

Table 5: Categories of Blockchains—Adapted from (Guo & Liang, 2016)

P Blockchain

Participants

Anyone

Specific groups

Centrally

controlled

Credit

mechanism

Consensus

Mechanisms

Collective

endorsement

Self-endorsement

Bookkeeper

All participants

Participants

decide

Self-determined

Incentive

Needed

Optional

Not needed

Prominent

advantage

Self-established

credit

Efficiency and cost

optimization

Transparency and

traceability

Prominent

advantage

Self-established

credit

Efficiency and cost

optimization

Transparency and

traceability

Typical application

Bitcoin

Clearing

Audits

Load capacity

30-20 times/second

1000-10000

times/second

Varies

III APPLICATION: FINANCIAL TRANSACTIONS

Analogous to how the digital wave disrupted the telecommunication industry, blockchain

technology is emerging as a FinTech paradigm shift (Guo & Liang, 2016) that promises to

enhance the efficiency of financial transactions and to transform the global financial network

altogether (de Meijer, 2015). Leaders of the financial industry expect the technology to disrupt

the sector. A 2016 survey conducted by McKinsey unveils that approximately 50 percent of the

executives in the financial industry are confident that blockchain technology will have a

significant impact within three years (Guo & Liang, 2016; McKinsey, 2016). IBM pronounced

that 66 percent of banks will have a scalable blockchain-based deployment by the year 2020

(Fortune, 2016; Guo & Liang, 2016; Zhao et al., 2016). Such predictions demonstrate that

change is imminent and may materialize within the next few years. Furthermore, the financial

industry has already begun to undergo a technological revolution (Accenture, 2015; Kiviat,

2015). To move from general notions of the impact of blockchain technology on financial

transactions, we focus on four specific issues that play indispensable roles across financial

transactions. These are asset verification, record keeping, data privacy, and transaction costs. The

relevance was explained earlier in Table 1 in relation to the three phases of any transaction

described by Workie and Jain (2017): 1) the initiation phase, where a client accesses the

blockchain network to buy or sell financial assets 2) the verification of financial assets in the

blockchain database by involved intermediaries and stakeholders, and 3) the recording of the

information into the blockchain ledger.

In this chapter, ‘transaction costs’ have a broader meaning to include transaction costs

from Transaction Cost Theory as well as production costs (Dyer, 1997) (Dyer, 1997; Zajac &

Olsen, 1993. In addition, we touch upon transition costs of moving from current technologies in

financial transactions to a blockchain-enabled environment.

III.1 Asset Verification

The first activity in trading a financial asset on a blockchain network is to verify specific

attributes of the asset (Workie & Jain, 2017). The asset verification involves confirming that the

parties who seek to exchange are the legitimate owners of the corresponding assets (FINRA,

2017). Ownership according to Stephen Pair, CEO of BitPay, is established when some entity

recognizes, documents, and defends the rights of someone over an asset (Tapscott & Tapscott,

2016). As such, blockchain technology can facilitate direct ownership verification by virtue of a

consensus mechanism (Workie & Jain, 2017) that is already agreed upon by all participants. The

confirmation of the ownership of the asset in the blockchain network is carried by a single full

node that constructs the block that encompasses the asset information and is also corroborated by

other full nodes in the network which continuously verify the validity of every new block and the

overall veracity of the whole ledger. The strength of the blockchain stems from that fact that no

single custodian—full node—has control over the entire ledger at any time (Rechtman, 2017).

Instead, it is akin to a majority rule. The apparent risk here is when a single entity controls over

50 percent of the custodians of the network (Rechtman, 2017). Whether that is likely or not

depends on the operational environment.

The immutability attribute of blockchain data makes it possible to store information

indefinitely in its database. Subsequently, this elevates the level of trust in the veracity of assets

information on a blockchain. Furthermore, immutability leads to traceability (Mori, 2016)

because blockchain contains verifiable timestamped records of every asset ever transacted in

blockchain (Crosby, Pattanayak, Verma, & Kalyanaraman, 2016). Therefore, by virtue of its

built-in native audit trail, blockchain technology is readily available to verify assets (Rechtman,

2017). As such, asset verification becomes viable and possibly more reliable using blockchain

technology. On the other hand, immutability means that it is not possible—especially in a public

blockchain—to fix a mistake pertaining to an asset by editing the database. Instead, one must

append the corrected representation of the asset in a new block. Therefore, immutability affords

traceability and reliability; nonetheless, it makes it difficult to fix mistakes and human errors.

Due to the nature of its distributed ledger, it is arguable that blockchain built-in

redundancy is helpful in significantly reducing the risk of losing assets information (Rechtman,

2017). Hence, compared to centralized databases, blockchain is more reliable and fault-tolerant

because clones of the database—chain or ledger—are maintained by multiple network nodes

(Mori, 2016). If most of the network nodes go down, the network will continue to verify records

uninterrupted since the database is available in many other nodes and the consensus mechanism

is independent of the number of operational full nodes. Nevertheless, redundancy comes with the

price of taxing resources in terms of storage and processing requirement.

In any case, a decentralized consensus mechanism requires significant infrastructural and

operational expenses in areas of communication networks, computation, and storage to operate a

chatty transactional financial system (Tsai et al., 2016; Yli-Huumo et al., 2016; Zhao et al.,

2016). Moreover, it requires effort to integrate blockchain-based asset verification, at scale, with

the financial legacy platforms and processes; and to enhance the capabilities of blockchain

technology to meet the requirements of the financial industry (Tsai et al., 2016). Financial

systems, for the most part, require high throughput and speed—stock exchanges execute over

100K transactions per second that may require asset verification; hence, blockchain technology

must be able to handle these types of loads. Moreover, Tsai et al. (2016) state that since the

blockchain protocols are executed sequentially, it is difficult to meet the financial industry

requirements no matter how much computational power is added, especially that blockchain

network is inherently slow because it is peer-to-peer, which means that each node needs to act

both as a client and a server. However, some people such as Mougayar (2016) argue that

scalability is a moving target that has, historically speaking, been met by technological

innovations and by the pressure of imminent demand.

From a compliance point of view, before deploying a blockchain-based network, there are

several regulatory rules concerning asset verification that broker-dealers need to devise ways to

comply with. Some of these asset verification requirements are established by FINRA and

Exchange Act Rules (FINRA, 2017). Furthermore, for a global blockchain covered by

heterogeneous jurisdictions, the task of asset verification from a regulatory framework is further

complicated (Mori, 2016).

III.2 Record Keeping

Record keeping is to resiliently and accurately preserve past information through time in

a manner that satisfies involved parties (Witte, 2016)—precisely what blockchain technology

does by design, and as such, blockchain technology is capable of keeping records (DuPont &

Maurer, 2015). Furthermore, the technology could have a significant impact on record keeping

(Kiviat, 2015) since it alters centricity and reshapes governance (Guo & Liang, 2016). Currently,

financial institutions keep records across disparate databases, unlike a shared blockchain ledger

which affords a central repository where records are accessible by all participating institutions.

Guo and Liang (2016) asserts that many of the financial sectors’ problems stem from a)

poor quality of records needed for assessing individual credit, b) inability to share records, c)

lack of utilization of external sources of records such as the Internet data, and d) difficulties of

meeting compliance requirements related to customers’ records such as know your customer

(KYC). According to Moyano and Ross (2017), the annual costs of KYC due diligence per bank

is up to 500 million dollars. They further conclude that financial institutions should collaborate

among themselves, and other stakeholders, to develop blockchain-based record keeping systems

to address these weaknesses. Such blockchain networks could be permissioned (private with

appropriate access control) to allow financial institutions (exchanges, central banks, banks, and

insurance firms) to enhance reputability, accountability, and controllability (de Meijer, 2015) by

computationally, efficiently, and seamlessly keep records across the financial value chain (Kiviat,

2015). Nonetheless, to achieve this desired vision for record keeping, financial institutions need

to agree on what records to share, how to contribute to the cost of building and maintaining the

network, and how to manage access control.

A record of information stored on a blockchain ledger attains further veracity over time,

and as such, blockchain technology is well positioned to be the source of truth, the provider of

accurate records, and ultimately, the platform for trust and record keeping due to its immutability

attribute and consensus mechanisms (DuPont & Maurer, 2015; Mori, 2016). Consequently,

blockchain technology can natively, seamlessly, and more transparently afford robust audit trails

of records of dividend disbursements, ownership details, stock split terms, stock transactions

timestamps, taxes reports, and compliance reporting requirements (Rechtman, 2017). Therefore,

blockchain technology is a readily available reporting infrastructure (Workie & Jain, 2017) and is

impactful to auditing and monitoring (Kiviat, 2015) requirements and practices desired by

financial institutions and regulatory bodies. To attain this collaborative record keeping interface,

it would require building the appropriate tools and processes. Additionally, inasmuch as

blockchain data is immutable and irreversible, the industry must innovate solutions for how to

address issues that may arise from erroneous human or platform record entries (de Meijer, 2015).

Furthermore, there need to be considerations of computational resources for maintaining a

blockchain’s growing ledger (Workie & Jain, 2017) that is redundantly stored in multiple nodes.

However, the risk here is likely insignificant grounded on Moore’s law that computing storage

and Central Processing Units (CPUs) tends to get cheaper and faster, thus allowing cheaper

record keeping and faster record retrieval. Furthermore, if we envision a future permeated by

machine-to-machine type of transactions, then when pushing the blockchain technology towards

the internet of things (IoT) periphery, the current blockchain techniques are generally not

appropriate since IoT devices work with low computational power and are limited to tiny

amounts of energy consumption (Atzori, 2016; Zhao et al., 2016).

According to Rechtman (2017), to guard against fraud and errors, financial custodians

keep records independently, and if a conflict arises between records during reconciliation, then

the majority win—Figure 8 illustrates the reconciliation process. It is arguable that blockchain’s

single truth can afford seamless records reconciliation. Figure 8: Records Reconciliation

(Rechtman, 2017)

In late 2015, Nasdaq finalized the first-ever private security record keeping over its

blockchain, thus leading to a significant reduction of settlement time and the elimination of paper

stock certification records (Nasdaq, 2015). Some of the financial sectors that could seek to utilize

blockchain technology to enhance their record keeping practices are a) equity markets, where the

current process require a slow and manual tracking of records of shares ownership, b) debt

markets, where the current settlement time is long and involves multiparty, c) repurchase

agreements, where currently there is risk of settlement failures and lengthy settlement time, d)

corporate bonds, where blockchain technology could digitize the records of assets and codify the

necessary calculations, e) derivative market, where records transparency could aid both

regulators and participants currently struggling to conduct and monitor the intricate post-trade

records and activities, and f) customer identity management, where a shared blockchain records

could provide a centralized repository to ease the task (Workie & Jain, 2017).

Again, there are regulatory requirements that need to be met by a blockchain-based

deployment vis-à-vis record keeping. For instance, broker-dealers have to comply with

recordkeeping compliance requirements such as Exchange Act and FINRA rules that mandate the

minimum length of time for keeping the record, establish the required type of records, and detail

accessibility to attestations (FINRA, 2017).

III.3 Data Privacy

Data privacy is an essential aspect in financial transactions because customers care about

their data privacy, and consequently, businesses must care as well since it makes good business

sense to care about the wants of the customers. Besides, financial institutions must comply with

regulatory mandates around data privacy. We could think about data here to mean two things: a)

content data that pertains to transactions and the like and b) identity data that provides

information about the users of a blockchain network. Furthermore, privacy and transparency are

two desired outcomes, but sometimes they conflict. While individuals usually care more about

their privacy than transparency, the collective typically cares more about transparency.

Blockchain technology can paradoxically and flexibly swing between a continuum of

high degree of transparency—decentralization of a public blockchain ledger makes the data more

accessible (Yli-Huumo et al., 2016)—and high level of privacy (Narayanan et al., 2016)—

pseudonymity of users of Bitcoin and similar blockchains is made possible by a lack of a central

authority that governs the network users as well as by its built-in cryptography. The level of data

privacy and transparency depends on whether the blockchain network is public, private, or a

hybrid, in addition to other operational architecture issues—see Table 5. Furthermore, the level

of transparency is also a function of the how the data is stored in the network since it is possible

to encrypt the data before sending it to the network. However, if access control is not managed

well, it can lead to dire consequences (Rechtman, 2017). Besides, although blockchain

technology could reduce security and privacy risk, it could introduce new issues because of the

decentralized nature of blockchain network (Workie & Jain, 2017). For example, safeguarding

private keys is of amplified importance in a public blockchain network. Although stealing private

keys from a blockchain network user is akin to stealing passwords from users of non-blockchain

users, the subtle difference is that if a password is forgotten, in decentralized blockchain network,

it is impossible to retrieve private keys due to the absence of a central authority.

Some people express concerns that bitcoin and similar blockchains could be used for

illegal activities encouraged by the anonymity of the users. However, as detailed by Narayanan et

al. (2016), Bitcoin blockchain is pseudonymous—network identities could be traced to realworld

identities. Also, the culpability of cryptocurrency to criminal activities is not more than cash.

Furthermore, since blockchain data is immutable, the fact that there is a permanent trace of

activities on the ledger could be discouraging to criminals (Tapscott & Tapscott, 2016).

Workie and Jain (2017) aver that innovative technologies, when operating in alignment

with the goal of achieving market integrity and protecting investors, could enhance access,

efficiency, and transparency. However, they go on to state the need to augment blockchain

technology with policies that address privacy objectives such as a safeguarding “personally

identifiable information and trade strategies.” Moreover, they assert that private blockchain

networks could exclude non-network participants from access to data and, therefore, reduce the

level of transparency.

In the views of Guo and Liang (2016), one of the problems facing the financial sector

stems from the lack of definition of privacy and security terms vis-à-vis ownership of user data.

It is arguable that the design philosophy of blockchain technology is founded on enabling users

to control their transactions and their data. Therefore, many blockchain technology advocates

such as Tapscott and Tapscott (2016) call for shifting towards a society where users are in full

control of their data. It is not clear if financial institutions will tilt towards the direction of less

centricity in controlling users’ data.

The area of user data is further complicated due to regulatory requirements such as KYC,

Anti-Money Laundering (AML), and customer data protection (FINRA, 2017). Nonetheless, the

lack of clarity of regulatory and compliance requirements create uncertainty for financial

institutions when assessing blockchain technology with consideration of privacy and

transparency requirements. Moreover, since a blockchain network could cross the boundaries of

multiple jurisdictions, financial institutions must contemplate how to satisfy privacy and

transparency regulatory requirements in these different jurisdictions. Besides, financial regulators

are still comprehending the implications of blockchain technology (Kiviat, 2015). For example,

the definition of finality in current settlements is radically different from the protocolbased

consensus mechanism in blockchain networks (Mori, 2016).

III.4 Transaction Costs

Past technological advancements had conceived substitutes that consequently intensified

the degree of competition. For instance, Internet financial products have encroached upon the

market share of traditional financial institutions (Guo & Liang, 2016). In order to survive and

meet ever-increasing customer’s demands, the financial sector must continuously innovate (Guo

& Liang, 2016; Zhao et al., 2016) and attenuate transaction costs (Zhao et al., 2016) through the

deployment of new technologies. Hence, blockchain technology has been touted as the

innovation engine for financial areas such as clearing and settlement, payment systems,

operational risks, and insurance (de Meijer, 2015; Kakavand & Kost De Sevres, 2016; Peters &

Panayi, 2016; Zhao et al., 2016).

Currently, interbank payments often pass through intermediary clearing houses where

they get scrutinized through complicated, time-consuming, and expensive processes (Guo &

Liang, 2016). The technology, according to de Meijer (2015) may reduce the cost of transactions

and increase their speed in the areas of business-to-business payments and peer-to-peer

remittance market; and could help in reducing the cost of the securities sector embodied by

exchanges and traditional banks. Nonetheless, from an implementation perspective, Workie and

Jain (2017) state that blockchain technology players, rightfully, focus on discrete applications

that target current pain points of significant inefficiencies with a vision of implement the

solutions gradually rather than adopting wholesale changes. A somewhat related point is made by

Mougayar (2016) who avers that it is easier to adopt decentralization from scratch versus from

centralized systems.

Although blockchain technology could allow long-term cost reduction, in the short term

some upfront expenditure is required to develop a blockchain-based infrastructure. Taking the

payment sector as a major candidate for innovation through blockchain technology, in the year

2013 and 2014, 5.4 billion dollars was invested in FinTech innovation (Kiviat, 2015) with the

anticipation that blockchain technology could revolutionize the infrastructure and lead to new

business models (de Meijer, 2015; Lindman et al., 2017) that could consequently generate more

value and save cost. According to a 2016 World Economic Forum report, the investment in

exploring financial applications of blockchain technology exceeded 1.5 billion dollars (Workie &

Jain, 2017).

In addition to the payment and clearing area, the technology could decrease transaction

costs related to credit information (Guo & Liang, 2016) and significantly reduce the amount of

time of settlement (Tapscott & Tapscott, 2016) enabling near real-time settlement due to its

network-based consensus mechanism, resulting in saving days of delay. However, the adoption

of blockchain real-time settlement would require a departure from established procedures for

lending and borrowing securities and the practice of conducting trades when the market is open

during specific hours of the day (Mori, 2016). Blockchain technology could automate the back

office operations in the area of clearing and settlement, and decrease the transaction costs related

to authentication of trading records by making them transparent to all participating parties (de

Meijer, 2015). Another target area of transaction costs reduction through the deployment of

blockchain technology is private equity exchange. To exemplify, NASDAQ established a startup

called chain.com to furnish a blockchain-based platform for private equity exchanges (Crosby et

al., 2016; Zhao et al., 2016). One of IBM’s goals is to utilize blockchain technology in order to

reduce coordination costs in capital markets and to streamline settlements in derivatives markets

(Coindesk, 2017b). In supply-chain finance, blockchain technology could reduce costs of

financing by automating manual processes and attenuating legal risks through smart contracts

(Guo & Liang, 2016).

McKinsey estimates that blockchain technology could a) reduce the cost of a cross-border

transaction from 26 dollars to 15 dollars, b) lower the annual operational costs by as much as 15

billion dollars, and c) reduce the annual cost of risk by as much as 1.6 billion dollars (Guo &

Liang, 2016). A FinTech report estimates that blockchain technology will allow banks to save as

much as twenty billion dollars in areas of cross-border payments, securities trading, and

regulatory compliance (Mori, 2016; Oliver Wyman, Anthemis Group, & Santander Innoventures,

2015).

Some researchers suggest that the deployment of blockchain technology alone will not

lead to significant reduction is transaction costs. For instance, Mori (2016) asserts that 80 percent

of the challenges in the financial industry are attributed to business models and processes, and

only 20 percent are attributable to technological hurdles. That means introducing blockchain

technology alone is not enough. To be effective, such efforts must be coupled with fundamental

changes of established process and business models.

Blockchain technology could potentially permeate all sectors of the financial industry. Its

impact will include private securities, insurance, Internet finance, and other financial sectors

(Wang, Chen, & Xu, 2016). However, in accordance with systems development best practices,

Tsai et al. (2016) suggest deploying blockchain features in modular and insular forms, with each

module targeting a specific functionality such as accounting, or trading, but not both.

Furthermore, the value of centralization itself should be carefully assessed as stressed by

Auctus_Team (2017) who warns against forcing blockchain technology as a substitute for

addressing problems that traditional centralized databases can solve sufficiently well.

IV PERSPECTIVE: STAKEHOLDER VIEWS

As one of the three pillars of the dissertation pluralist methodology, we have interviewed

sixteen participants with expertise in blockchain technology and the financial industry. The views

of the stakeholders augment the literature review presented above, and both chapters will be

analyzed later through the lens of transaction cost theory. Six of the participants held executive

roles in financial institutions, five were researchers, and five were subject matter experts. The

diversity of views provided a number of opportunities, challenges, and recommendations

regarding blockchain technology and its impact on financial transactions. In this chapter, we

synthesize the participants’ perspectives with a focus on asset verification, record keeping, data

privacy, and transaction costs. The views are grouped into four areas: transaction issue,

technological issues, regulatory issues, and adoption issues. As mentioned earlier, in this chapter

‘transaction costs’ have a broader meaning to include transaction costs in the sense of

Transaction Cost Theory as well as production costs (Dyer, 1997; Zajac & Olsen, 1993); in

addition, we touch upon transition costs of moving from current technologies to a blockchain-

enabled environment.

IV.1 Transaction Issues

Participants agreed that financial services are based on trust. Hence, when a transaction

transpires between two parties, the financial intermediary verifies the asset, records the

transaction, and ensures that both parties are served satisfactorily: “When buying shares,

financial institutions guarantee delivery of those shares and the agreed upon payment to the

corresponding parties. Even if one party defaults, financial institutions absorb that risk by

delivering to the other party.” Consequently, the intermediary financial institution charges a

commission for the service. The above scenario exemplifies the type of trust-based service

blockchain technology will have to deliver if it were to play a role in asset verification and record

keeping.

“Visa today takes 3% of the transaction fee if you pay at a Walmart. Inherently, Walmart

will include that in the price since most of the transactions are credit card based,” said one of the

participants. Financial institutions also incur high costs when they go through intermediaries:

“Clearinghouses trade trillions of dollars daily. They charge a commission for each transaction.

Although it is an extremely tiny commission, with millions and millions of transactions, banks

have to pay substantial amounts.” Blockchain technology could afford opportunities to attenuate

these types of costs. Current financial institutions have been closely linked to central banks,

partially for regulatory purposes. Stock exchanges, brokers, and banks participate in assets

verification and record keeping in a manner that is inefficient as it takes a long time and uses

significant human resources. Some participants believed that blockchain technology would

reduce transaction costs: “You have to stitch so many different things and pour millions of

dollars. If you have blockchain architecture, this cost will drastically reduce, because everything

is connected.” Another participant advocated using blockchain technology as a means “to

support transactions across geographical distances without a very heavyweight institutional

arrangement.” Nevertheless, others see the phenomenon as “full of hype and euphoria with real

potential for only a few use cases.” Along similar lines, a financial executive participant stated

that “blockchain technology opportunities are limited because of the way the whole asset

industry is structured right now. Change is not happening, it would require quite a bit.”

Nonetheless, the majority of participants believed that blockchain technology will further elevate

that level of network-based trust and furnish a better platform for verifying assets, keeping

records, protecting data privacy, and reducing transaction costs: “Blockchain technology can

codify something of value and assign it a proof of authorship or a proof of ownership, and that

becomes a digitally codified asset. Which when put on the blockchain will be immutable,

meaning everybody can publicly verify it via a search and authenticate who owns it, at a specific

timestamp.” Given that it could be shared publicly, at a much lower transaction cost than we do

today.” Another participant expressed the current issue with transaction costs as follows: “Today

in banking for example, if you own a credit card, if you pay merchandise from Walmart, the

payment has to process through a number of channels, first of all, the card issuer: e.g., Bank of

America. Also, the transaction has to pass through different payment networks such as Master

Card.”

A few of the participants pointed out that, in some regards, we now trust computers more

than people as exemplified by Uber: “I will get in a car with somebody in the middle of the night

that I have never met before. Still, I completely trust that the Uber driver has been vetted well

enough by the network.” Blockchain exemplifies such networks that are capable of asset

verification and record keeping concerning reputational data. However, like every newly

introduced technology, blockchain is not fully charted waters as expressed by one of the

participants: “It is so fascinating, and we still do not understand it. We still do not understand

some of the negative.”

Some participants compared the inevitability of the permeation of blockchain-based

financial transactions to what some countries in Africa and South-East Asia have done regarding

cellular technologies as “they leapfrogged western economies such as the USA or Canada. I

could send money from one person to another person, in Kenya five years back. The USA is now

trying it out. Now all the banks are doing it.” Hence, it is quite possible to leapfrog with

blockchain technology, not hindered by all the regulations or all the legacy technologies. For that

reason, “some of the venture capitalists think the next Apple or Google will come from the

blockchain world.” Nonetheless, some participants posited that just like the Internet promised to

decentralize and ended up moving in a different direction, blockchain technology will not deliver

on all its promises. For example, the current transaction fee structure in a Bitcoin and similar

blockchains has not fulfilled its promises of allowing microtransactions at low cost. Moreover,

the quest of decentralization itself could prove to be elusive “It is frequently the case in human

history that people think that anarchy is a good idea, but it turns out that every time that power is

put in the hands of people, we end up coalescing into some centralization.” Blockchain mining

pools is an example of how we are trending towards centralization as time passes.

Many participants saw inadequacy in the number of transactions per second—

throughput—despite some promising consensus-based mechanisms. Therefore, they suggested

that the technology is not ready for prime time for financial transactions. In the USA some banks

have 35 million customers or more. In China or India, some banks have over 100 million

customers. It is a daunting task for a blockchain to handle that type of volume in real or semireal-

time: “Imagine, you are at a cashier, and instead of only Visa approving your transaction, every

participant has to approve it, verify its authenticity, and get to unanimity.” Those are the type of

challenges that need to be overcome computationally before blockchain technology could be

adopted widely. Developers have to come up with algorithms that meets current processing

standards because “when customers go to Walmart, they have expectations that their cards will

be approved in less than 30 secs.” Contrarily, one of the participants pointed out that although

instantaneously processed, Visa and similar settlements take several days in the backend.

Payments fall into two buckets. The first bucket is consumer payments which are person

to person, person to commercial, commercial to commercial, and commercial to person. The

second bucket is treasury payments, and that is bank to bank. The payment sector uses the

SWIFT (Society for the Worldwide Interbank Financial Telecommunication) platform to carry

interbank payment instructions. In the SWIFT network one bank could connect directly to

another bank, or the case could be it must go through an intermediate bank to exchange the

payment information with another bank. No one bank is connected to all the banks. Those

intermediaries collect transaction fees. Going through the SWIFT hob is essential since

regulations mandate banks to know who is on the other end of the transaction. Nevertheless,

treasury payments are not slow because of the speed of SWIFT. The speed issue could be due to

banks holding on payments to check certain things. To resolve these issues, SWIFT is being

replaced by a new platform called SWIFT GPI (Global Payment Innovation). SWIFT GPI is an

improvement over SWIFT since it mandates filling some of the payment fields such as the tax

rates. Moreover, participating SWIFT GPI banks must meet certain service level agreements.

Against this backdrop, participants in payments sector had no high anticipations from blockchain

technology in the treasury payments area since SWIFT GPI is resolving speed and transparency

issues. Additionally, the issue with speed concerning treasury payments is not technological but a

liquidity issue: “It is bit of a falsehood to think money is flowing all the time, because unless

value passes from one place to another” via central banks, “it does not really happen. The

limitation is business days and time zones. Commercial banks are governed by their central

banks and central banks close. That is a critical component to how fast you can go when you go

around to the other side of the planet.”

It is not straightforward to compare the costs of transactions that are blockchain-based

versus those that are not. For example, factors that contribute to a transaction costs stemming

from a Visa payment are radically different compared to a cryptocurrency payment—

computational energy, fees, and so on. Therefore, “transaction costs should be viewed on a use

case basis and cannot be generalized.” Moreover, use cases differ. For example, “if it takes me X

amount of dollars to send one bitcoin from one party to the other, that is different from

transacting a bond. When you start looking at it that way, you also have to look at matching

architectures.” Asset verification and record reconciliation are not simple, and according to a

participating financial executive, this is where blockchain technology could make a difference:

“Let us take Apple shares for example. At any point in time, we need to know who has assets or

equity in Apple because we need to have the correct info to be able to pay dividends, taxes, tax

rates, etc. Keeping track of that is very tricky. Therefore, reconciliation is very complex, and

something takes long. That is where blockchain technology might make a difference.”

Some participants advocated using blockchain technology for internal operations

concerning record keeping, asset verification, and data privacy protection: “It does not have to be

a public or peer-to-peer in the consumer sense. They can use blockchain technology just within

their ecosystem and start using distributed computing as the way to securely store private

information.” For example, record keeping, and asset verification processes could indeed take

advantage of blockchain technology: “hedge funds try to verify assets. They use excel sheets.

Many things are messed up.” On the other hand, some participants argued that blockchain

technology is more effective in attenuation transaction costs in large multiparty context:

“Blockchain technology brings down transaction costs for large multiparty transactions where

many institutions and people come together such as stock exchanges and the DTCC. For internal

system concerned with record keeping, inventory management, and the like, there has not been

much blockchain-based application development.”

Potentially, blockchain technology could introduce a massive change regarding how we

would interact with capital markets: “The way to raise capital today is either you through

investment banks as a company or through private placements with institutional investors.

Tomorrow it is going to be a blockchain environment.” Another participant echoed views along

the same lines: “In the USA alone, only 55% of the people have access to the stock market, and

these types of new technologies are going to socialize finance.”

Before applying blockchain technology to enhance asset verification, record keeping, data

privacy, or transaction costs, it must prove its advantage over established technologies: “You use

blockchain technology in a use case that is very centralized. Besides, if your system does not

require any trust because it is a single company, then you probably do not need blockchain

technology.” Finally, one of the participants stressed the need to objectively contemplate the

dichotomy of centralization versus decentralization without taking sides. “I listened to Vitalic

Buterin—the founder of Ethereum—and he realizes that there is just as many good people and

just as many bad people in both the cryptocurrency world and the banking industry.” Table 6

highlights the summary of this section.

Table 6: Industry Perceptions of Transaction Issues

Blockchain technology can

reduce transaction costs and

improve asset verification

and record keeping

Blockchain technology is

uncharted waters in the area of

financial transactions

Deploy blockchain

technology only when it

adds value relative to

established transaction

technologies

Blockchain technology can

improve efficiency of

record reconciliation

Blockchain technology can

increase access to finance

and capital markets

Current capabilities of blockchain

platforms do not meet all financial

transaction requirements

Financial institutions find it

difficult to understand the impact

of blockchain technology for

financial transactions

Deploy blockchain

technology for large

multiparty transactions

Compare blockchain

versus non-blockchain

transaction costs on a use

case basis

Blockchain technology can

enable leapfrogging,

especially in developing

economies

It is difficult to compare costs of

blockchain transactions to

nonblockchain transactions

IV.2 Technological Issues

“Most processes are semi-manual, and therefore the sector is looking for ways to

optimize, automate, streamline, and make transactions faster while maintaining the same level of

security,” said one of the financial executives while stressing that it is becoming increasingly

difficult to generate satisfactory profit. Most participants believed that blockchain technology

could play a major role in improving the processing of financial transactions. According to one of

the participants, some studies show if blockchain technology is used as an infrastructure,

transaction cost will decrease anywhere between 25 and 75 percent. However, a few participants

stated that blockchain technology is meager as architecture or that “it is hype more than better

technology.” Moreover, financial transaction systems are not just a single system that could be

simply replaced by a blockchain-based system. They are multiple interconnected systems.

Consequently, one of the participants posited that “there would not be a chance for a disrupter to

come and change the way things are set up. Few people would even understand what we do.”

An executive from the insurance sector described a use case which illustrates how

blockchain technology is being implemented to enable asset verification, record keeping, data

privacy and transaction costs attenuation: Today when two people get into an auto accident with

each other, their proof of insurance is paper insurance cards. The coverage could have been

canceled. To improve the process of proof of insurance, “we developed a plugin that goes into

Geico’s or Allstate’s mobile APP.” To exchange insurance information, the two people tap their

phones together to access “the policy blockchain to get verification of current coverages.”

Moreover, in the future, authorities could get a feed from the state department of motor vehicles

of licensed motorist and compare that to that policy blockchain and be able to identify uninsured

motorist proactively. The policy blockchain is a private blockchain “accessible by participating

insurance carriers, insurance distribution firms, and brokers.” It uses ‘proof of authority’ as a

consensus mechanism—the level of access is based on the user’s identity. When the two drivers

tap their phones together, they get a temporary access to each other’s data. Although the ledger is

distributed, some of the data is hashed such that participating institutions can only see what they

want each other to see. Blockchain technology allows different degrees of so-called

zeroknowledge proof, whereby one can, for instance, prove she had a private data at an earlier

time without revealing its content. For instance, “if I want to confidentially prove that I have the

idea on a certain date, I would hash it and put the hash on the blockchain. Later, if someone says

I have the idea, I can prove that I had the idea by showing its timestamped hash on the

blockchain, and ‘unhash’ it with my public key.”

There will always be cryptography researchers working on developing better encryption

methods. Contrarily, there will always be cryptography researchers looking for ways to break

encryption. Part of that is driven by the tension between privacy and transparency where, for

instance, the government believes that it has good intentions when finding ways to break the

current methods of encryption: “Government wants to have more visibility, and citizens often

want more privacy. That ongoing is not just related to blockchain technology.” Additionally,

hackers also play a role in breaking cryptography, and consequently, push researchers to find

stronger cryptography schemes: “There is no model that humans can build that has perfect

encryption. Also, in the next 50-100 years, we might see quantum computers that will break all

methods of encryption we currently have. With the advent of AI (Artificial Intelligence), there

might be better encryption built with AI. Nevertheless, there could also be better ways to break

the cryptography by AI.” When someone breaks a hash function, we stop using it and come up

with a stronger one. Breaking a hash function does not mean that hashed data could be inverted.

Even after a hash function is ‘broken’ it is still useful for checking data integrity. It is almost not

possible to recreate the original piece of data. Hence, breaking a hash function is not a danger to

privacy or the data integrity. However, “we run the risk of the hash losing its proof of prior

knowledge of something” as we have explained above.

Another intriguing area related to privacy is identity. There are personal identity data and

user-generated data. Many participating subject matter experts believed that blockchain

technology allows users to control the use of their data: “Self- sovereign identity means if it is my

identity, I should be empowered to share it with whomever I want, whenever I want, but only

limited to whomever I want. The government can attest to my identity and can authenticate it but

at the end of the day it is my identity.”

Especially with public blockchains, another security issue is “the risk of losing

passwords” or private keys since no central authority exists to allow retrieval of private keys. As

such, backing up and storing private keys is crucial. Doing so, however, might compromise these

private keys. When implementing blockchain technology, in addition to the costs of building up

the blockchain network and employing blockchain technology experts, there are also security

costs. It is not clear if blockchain technology security costs are higher than with current systems:

“Currently they have to safeguard the database. So, they are facing similar issues. However, with

blockchain technology, cybersecurity may be of a different nature. People cannot take over the

blockchain, but if they can steal your keys, they can wreak havoc.” Blockchain by itself is

phenomenally secure, is hard to hack, and even if someone manages to get closer to that, the

system can upgrade to a different cryptographic protocol and keep it more secure: “Breaking in

the blockchain is very remote. I do not foresee that happening in the near future. All the stories

about someone stealing Bitcoins or hacking Ethereum are because of bad coding or bad ways of

saving private keys.”

All participants agreed that scalability is a significant technical challenge. Therefore,

although we have touched on scalability in previous sections, we will treat it here for further

details. Blockchain is “centralized and fully decentralized at the same time. Therefore, it takes

long to validate transactions since it has to be one truth and it has to be distributed so that

everybody has access to it at the same time.” It is not easy for an entire large network, through a

censuses mechanism, to agree to a single record. That is one of the reasons it is difficult to

achieve high throughput. Nonetheless, “there are several proposals to increase that.” For

example, Bitcoin is testing a proposal called ‘lightning’ where transactions could be verified on

‘sidechains’ and bundled together then pushed to the main blockchain as a single record. In

addition to the speed issue, blockchain networks that use proof of work type of consensus

mechanisms require much energy consumption. Nevertheless, “there are many other mechanisms

such as ‘proof of stake’ that are faster and more energy friendly.” For private blockchains,

scalability is less of an issue since the networks are smaller. Another challenge with scalability is

the sheer size of the blockchain. Blockchain is sequential: “When you have a huge number of

transactions every second, then the size of blockchain can grow to become unmanageable.” That

also results in “fewer people being willing to store the entire blockchain,” thereby weakening

some of the advantages of decentralization. Ethereum has a proposal called ‘Plasma’ with the

idea of storing only part of the blockchain. Of course, there must be a way to access the full

history when needed. Furthermore, some of the participants reasoned that space is “not a big

issue because we have already seen solutions in the past such as light nodes that do not need to

store the full blockchain." Besides, “memory and hard disk space are cheap these days.” From a

strategic scalability perspective, “it is hard to be aware of all the different flavors of blockchains

in an arms race to see who can provide better features.”

The blockchain ledger could accept unstructured data which could pose a technical

challenge since bad data could go in without governing rules. In a structured database, “there are

some rules codified in the database, which make sure that the data that goes in is pure and

pristine. Blockchain has no such rules.” The issue is especially concerning when considering the

immutability nature of blockchain records: “In a public blockchain it is hard to go back and

modify the record because one has to get agreement from everyone.” That is precisely what

happened when Ethereum had to split into ‘Ethereum Classic’ and ‘Ethereum’ since people could

not agree on whether to rectify the record or not after a hacking incident. In a permissioned

blockchain, it could be manageable for participating parties to agree to modify the record.

Notwithstanding that challenge, this dissertation adopts the core definition of blockchain as being

immutable. Immutability, on the one hand, is an advantage because nothing is ever lost. On the

other hand, as we mentioned earlier, it taxes the network computational resources. Many of the

participants advocated storing data into the blockchain ledger only when there is a need for

immutability and keeping the rest in a different database that could be accessible by the

blockchain network. Some of the participants went further to express reservations regarding

using blockchain as a database: “Many people try to turn it into a database. Blockchain should

not be used as a database, is not made to be one, and is not very good one if you try to use it that

way.” Using blockchain as a database is “basically wasting space.”

A best practice adopted by a consortium led by one of the participants was to build a

reusable blockchain framework that can “accelerate the building of applications on top of this

framework.” Leaders of a consultancy recommended staying platform agnostic: “We see

advantages in being platform agnostic and have the choice between all different platforms. We

believe that there are use cases for every one of them.” Each blockchain platform has its

technical advantages and disadvantages. For example, Ethereum is suitable for smart contracts

while Ripple is a better fit for payments. As such, a participant who led a consortium averred that

building an interoperability layer is vital: “One of the things that we have built into our

blockchain framework, and again this is very bleeding edge, is an interoperability layer.”

Table 7 highlights the technical opportunities, challenges, and recommendations related to

blockchain technology in the space of financial asset verification, record keeping, data privacy,

and transaction costs.

Table 7: Industry Perceptions of Technological Issues

Blockchain technology

could further automate

many financial

transactions processes

It is hard to keep up with the

technical features of different

blockchain platforms

The need for immutability

qualifies if the data should go

into blockchain or not

Blockchain records are

stored redundantly and

cryptographically secure,

making it hard to lose or

hack

Provisioning access in a

permissioned blockchain is

complicated

Access provisioning schemes

are critical for competing

entities to be comfortable with

having data in a common

blockchain

Blockchain affords a

central collaborative

repository for record

keeping

Hash functions are almost

guaranteed to be broken in

the future

Build the blockchain framework

in a manner that is extendable to

broad use cases

Blockchain can fit the

desired shades of privacy

and transparency

Blockchain throughput is

currently not adequate for

some financial applications

Remain blockchain platform

agnostic

Blockchain enables users

to control their private

data

It is not possible to retrieve

lost private keys in

blockchain

Device secure practices for

storing blockchain private keys

IV.3 Regulatory Issues

Since it deals with public money, the financial sector is “one of the most regulated

industries in the USA.” Regulations are essential to protect the public from being subject to

misguidance, robbery, “Ponzi schemes,” and other types of mischiefs. Although blockchain can

be used to bypass regulations and intermediary financial institutions, participants argued that no

matter how the technology is developed, it “will end up landing somewhere in a jurisdiction”

Some laws will be federal, and others will be state laws: “In the European Union (EU), there will

be federal laws at the EU level, and there will be laws specific to each country.” As such,

blockchain technology will be regulated like other financial services technologies where

regulations vary greatly from country to country with “some common denominators to account

for global concerns such as KYC and AML.” Regulating blockchain technology could, therefore,

be challenging and “confusing because the beauty of decentralized networks is not having

borders, although we still have borders and live in physical places. There are rules and taxes that

we cannot just end on a dime.” In any way, some of the participants cautioned against

overregulation: “Overregulation is not good because it stifles innovation.”

The technology is still new and evolving making it difficult for the regulators to have a

good grasp of how it works: “The problem is that the regulators themselves do not understand

how cryptocurrencies or blockchain technology works. This is a new and evolving technology.”

From a regulatory point of view, there are two schools of thoughts: the first advocates pushing

new laws right now; the second advocates waiting and monitoring patiently to see what type of

new laws will be required. Which school of thought prevails “depends on what the technology

ends up facilitating.” It also depends on if ‘catastrophic’ events transpire as exemplified by one

of the participants: “It is only a matter of time. In 2008 banks went bankrupt. The regulations

were missing certain areas that caused the collapse of the banks. Then the government bailed out

the banks causing a massive loss for the economy. It took more than ten years to recover.” Hence,

right now the regulators ought to start thinking how to regulate blockchain technology and in

what form without crippling innovation. A US-based participant argued that the state of

regulatory uncertainty is hurting the growth of blockchain technology: “The largest problem is

the regulatory framework. The USA is behind. Uncertainty is hurting blockchain technology.

Only 12% to 18% ICO (Initial Coin Offering) is based in the USA. The country waited for too

long.” Nonetheless, some participants expected regulations to solidify in the coming one or two

years: “In the range of a one or two-year timeframe we could expect to see some regulatory

guidance and control in place.”

Current regulations have been tailored for a “financial ecosystem that we have developed

over the past 100 to 200 years.” The regulatory framework will have to adapt to the new

financial practices we are creating. Regulations typically lag innovation: “Regulations are always

two phases lagging behind the maturity of the technology.” Moreover, regulations take time:

“There are many approvals required, notices of proposed rule meeting—meaning making

regulations based on feedback from the industry—or passing bills such as the Dodd-Frank Act.”

Still, in some blockchain-related areas, we already have some regulations: “There are pockets of

cryptocurrency or blockchain technology where there are regulations right now.” For instance,

Bitcoin futures are now listed on Chicago Mercantile Exchange and Chicago Board of

Exchange—both are well respected financial institutions that are regulated by the Commodity

Future Trading Commission.

When asked whether incumbents or startups will spearhead blockchain technology,

executives in the financial industry answered in favor of the former. They reasoned based on

regulations: “Regulatory requirements are the biggest hurdle for a blockchain-based alternative

provider to be a disruptor and start offering services as we do.” Incumbents already adhere to a

comprehensive set of regulatory and compliance requirements. As such, their answer implicitly

averred that blockchain-based services would be heavily regulated. One of the participants

illustrated the challenge facing new entrants as follows: “Google or Amazon tried to develop

their own bank. Their CEO admitted that it was more complicated than they thought it would be.

That was just plain vanilla capital banking or commercial banking. I do not think they could

venture into corporate banking, investment banking, the whole payment industry, or securities.”

Financial institutions spend a large part of their budget on compliance. Some participants

stated that compliance costs are by far the primary cost factor: “We spend more money and time

on people who look after compliance than we spend on people who serve clients.” As such,

blockchain technology could potentially attenuate the compliance-related processes, and

therefore, significantly reduce financial transaction costs. The idea is to store customer’s

information into a shared blockchain ledger instead of each financial institution vetting every

customer on their own: “Blockchain technology is a fantastic way to comply with KYC. All you

have to do is to put the data on the blockchain, and anyone can use an App to verify.” Of course,

this should be done in compliance with regulations governing customer data privacy.

Blockchain technology can be used for positive and negative purposes. Some participants

expressed concerns about using its cryptocurrency for illicit activities such as “drug trafficking,

arms smuggling, or any illegal activity such as requesting ransom payments.” At some point in

time “China banned Bitcoin. Banning is not a solution, but you need to have effective controls to

avoid illegal activities.” North Korea, given the type of scrutiny put on its transactions, is

allegedly channeling money through Bitcoin and other cryptocurrencies. Hence, the recent

appreciation of cryptocurrency is partially attributed to higher demand generated by North Korea

and the like.

When computers and the Internet sprung into existence, there was a need for some

regulatory arrangements to allow authorities to snoop on suspects’ hard disks and online

activities to check for illicit activities such as child pornography and terrorism. There might be

“a need for some extra sort of blockchain sensors” to achieve similar objectives. In any case, the

nature of privacy-related regulations “will vary greatly from country to country, from Estonia

where everything is on blockchain, to countries where they will take many years before doing

anything.”

Blockchain technology could challenge some of the established data privacy norms. For

instance, today, in the USA, three credit bureaus have the oligopoly on credit scores of people:

Equifax, Experian, and TransUnion. If the USA has something like Lithuania’s identity

management blockchain, anybody can check out credit scores and other details. That will be a

significant change to how asset and record verification are conducted. Furthermore, the presence

of blockchain technology could surface some renewed regulatory questions: “Who authorized

Equifax to collect data on me?” Equifax, Experian, and TransUnion are not governmental

entities; they are private companies. What are the users’ rights “regarding Equifax securing their

identity?” “Who authorized Equifax to share their data?” and “What do they gain from Equifax

sharing their data?” Users may gain access to services by virtue of their identity information

being shared. However, there are no direct monetary benefits to the user. Hence, blockchain

technology can alter the landscape of credit rating agencies: “People can even obtain a return

from their data. That would affect the business model of credit rating agencies and may reduce

their profits. They might even cease to exist.”

One of the participants explained the regulatory framework surrounding blockchainbased

financial transactions as follows: “Mycelium is a smartphone App that taps into Bitcoin

blockchain.” A person could be living anywhere in the world and be able to send and receive

money to anyone anywhere. Having Mycelium is akin to having a global bank account “without

having to go to a place and give my photo ID or registration. I just downloaded the app.” That

puts a different burden on regulators since today, “regulators are used to work through the

banks.” As such, regulators have shifted the burden of enforcing the prohibition of activities such

as money laundering to the banks. The authorities just audit the bank’s ledger. With the presence

of Mycelium, the regulators must pivot, change, and adapt to a different way of looking at

transactions. Hence, KYC is no more like a person going into a place giving her identification

card. KYC in the future “will mean who is downloading the information? What is the serial

number of the device? To whom is the device registered?” There will be an expanded network of

things coupled with a rich web of activities that the authorities could tap into to know the

customer. The authorities will have to crawl these different pieces of information and stitch them

together to get a reasonable picture of the customer.

Nivaura, a UK-based company, “just a few weeks ago issued the first regulated bond in

collaboration with the British regulator.” Nivaura resolved the technical aspects and engaged the

regulator to agree to two things: 1) this is a financial instrument that lives in a public blockchain,

and 2) it is a legal instrument, meaning that parties involved in the transaction have legal

obligations they must adhere to (if not, one party could drag the other into the court of law). This

is an illustrative “example of innovative companies engaging with regulators to expand the

regulations in a way that makes sense in this blockchain real world” related to asset verification,

and record keeping. A different example refers to the ‘proof of insurance’ example detailed

earlier. In this case, the road had already been paved from a regulatory standpoint since every

state in the USA had already agreed to honor electronic verification of proof of insurance.

Notwithstanding other use cases could summon more restrictive requirements from regulators,

especially with regards to data privacy, asset verification, and record keeping.

Finally, blockchain technology could offer a collaborative platform that is also helpful to

authorities in terms of streamlining the reports required by the regulators from financial

institutions: “It is a big arduous task for them to gather that information across various back

office systems. If you have the information on the blockchain, you could very easily create a use

case to do all that regulatory reporting very quickly and cut out many working hours required for

that.” Table 8 summarizes the perceptions of the industry stakeholders on regulatory issues

concerning the impact of blockchain technology on financial transactions.

Table 8: Industry Perceptions of Regulatory Issues

Blockchain technology can

reduce financial transaction

costs related to compliance

Blockchain technology is new

and evolving, making it hard

for regulators to grasp

Regulators should guard

against overregulation so as

not to stifle innovation

Blockchain offers an

immutable trail of records to

authorized auditors

The state of regulatory

uncertainty is hurting the

growth of blockchain

technology

Regulators should adapt to

emerging paradigm shifts in

financial transactions

Blockchain-based platforms

can furnish a streamlined

and collaborative reporting

infrastructure

Blockchain-related regulations

will vary accross jurisdictions,

challenging the borderless

nature of blockchain

Innovators should

collaborate with regulators

to back their products with

authoritative power

IV.4 Adoption Issues

The current financial ecosystem operates based on well-established processes and

methods of transaction. With the introduction of blockchain technology, we can transact, verify

assets, keep records, and protect data in a decentralized fashion with fewer intermediaries and

fewer loci of control, thus, enabling a consumer-to-consumer web of transactions. Nonetheless,

some participants questioned some of the core value propositions of blockchain: “To say you

have a private blockchain, why even have a blockchain? Why not just have encrypted hard

drives?” Other participants countered: “Who will maintain the common central database? You

have several banks, and each has its own interests. A central party, such as a stock exchange,

will have monopoly power and will charge other parties. Blockchain technology allows

decentralized environment management without relying on a central party.” Depending on how

compelling the new technology is, the availability of resolutions of some of the challenges, and

the degree of willingness to embrace, the financial transactions ecosystem might adopt the

emerging technology at varying rates and degrees or might reject it all together. One of the

participants averred: “The current ecosystem is not sophisticated enough to fully disintermediate.

It may take 10 to 20 years to get there. Will there be a pure peer-to-peer transaction? That

depends on the use cases and the relative value it creates.”

The RiskBlock is an insurance consortium. They use a social concept called ‘proof of

collaboration’ to encourage and monitor the effectiveness of blockchains shared among a number

of highly competitive insurance companies that are typically cautious about how much

information they share with each other and how much they work together: “One of the first

hurdles that we had was to be able to prove that these competitors could come together on these

various solutions and work together.” Regardless of the quality of the underlying solution, a

shared blockchain would not be useful if participating parties are not willing to work together:

“It does not matter how good the proof of insurance is if it is one-sided.” From a data privacy

perspective, the starting point is public blockchain where everyone can see all the data records,

although they may not see the identities of who are conducting the transactions. However,

financial institutions do not want all their data to be public: “Some of them are legally bound

from disclosing all their data.” Even if the data is encrypted, there is a risk that “someone could

break the cryptography or reverse engineer the data.” The successful adoption of the RiskBlock

for asset verification, record keeping, and data privacy protection is driven by the demonstration

of immediate benefits to the participating parties such as “reduced cost, enhanced efficiencies,

customer service improvement, and greater revenue.” As such, consortiums must focus on

bringing true production value to their members: “Our motto is 'no science experiments' such as

proof of concepts and standalone projects that never make it into production."

“No organization wants to be a dinosaur when significant changes transpire,” said one of

the participants. Large financial service providers are, therefore, exploring blockchain technology

by typically building pilot projects on top of the Ethereum public blockchain platform where

implementations may be private, or may utilize some other framework such as Hyperledger—an

open source blockchain technology development consortium. Many financial institutions have

their in-house research teams. For instance, Bank of America, one of the biggest banks in the

USA, has already filed for more than twenty-five patents in the area of blockchain technology. A

participating financial executive stated that incubating blockchain technology projects is

inevitable because “I fear that something might come along with blockchain technology that I did

not see, and I lose positioning.” Another participant echoed views along marketing lines: “Every

bank in London has blockchain technology projects, mostly so they can just say they have one.”

Even technology giants such as IBM, Microsoft, and Oracle offer various implementations of the

technology. However, many of the implementations are exploratory in nature: “Blockchain

technology projects are fairly small-scale operations, and for the most part it is more about

trying to figure it out.” Financial institutions are hesitant to spend heavily or build their own new

private network within their organizations since: “CTOs, CIOs, and CFOs are waiting until

blockchain technology is mature before they spend the money.”

Nevertheless, there are high anticipations of growth: “I envision that in the next couple of years,

the growth will speed up, and people who initially doubted blockchain technology will realize its

potential.”

Some sectors are more advanced in their roadmap than others: “The Australian stock

exchange is going to move all their settlement on blockchain making it much more efficient. The

verification will depend on cryptography. The transaction will ensue instantly.” The participant

continued: “Traditional financial transactions such as stocks and bonds will still take place on

established stock exchanges such as Nasdaq or NYSE (New York Stock Exchange), but they might

move their settlement to a blockchain.” Senegal and Tunisia already have their currencies on

blockchain. Singapore and China are thinking about coming up with national digital currencies

“because of the transaction cost. It will boost the GDP by 3 to 4 percent just by replacing 30 to

40 percent of the national currency with cryptocurrency due to the reduction of friction.”

Blockchain-based startups will force incumbents to reduce transaction costs: “Visa and

MasterCard are now a duopoly in the payment sector. If we have many other options then,

especially internationally, they have to reduce their fees drastically to remain competitive.” In

essence, startups are innovating. However, established financial institutions are not sitting still.

As such, “blockchain technology will disrupt many businesses like how Apple changed the

Newsweek.” Overall, “the winner might be the customers because they will enjoy better service,

faster transactions, more transparency, and to some extent they will be more in charge of their

own data and their own assets.” Nonetheless, it is difficult to realize the possibilities of a new

technology as exemplified by one of the participants: “In my daily routine, when I ask operation

people: Can blockchain technology apply to this or that? The answer is always no.”

As an adoption roadblock, the dichotomy between privacy and transparency is not a

technical issue but a business choice concerning the balance between confidentiality and

verifiability: “If you encrypt data, then you increase privacy and confidentiality, but you lose

transparency and verifiability. This tradeoff will always be there. There is no technical solution

to that. It is a business decision.” Public blockchain networks allow high degrees of anonymity

but “we cannot have a system where people do things completely anonymously.” There are

different blockchain networks with different objectives from a privacy perspective. ‘Zcash’ and

‘Monero’ are the type of blockchain networks that claim to offer full privacy protection.

However, participants believed that no blockchain is fully anonymous because one could track

transactions back to a user’s activities and patterns. Concerning asset verification and privacy, all

participants believed that it is easier to track blockchain-based transactions than tracking cash

transactions.

A general challenge is how to maneuver the idea of blockchain technology “in an aligned

way of using it within the existing system and then in a radically new way of pulling things apart

so you can do things in new ways.” Overall, adoption is more concerned with desired business

outcome than with technology: “I would be more interested in getting a technology that helps me

measure and manage liquidity. If a specific technology makes that possible, I will buy.” The fate

and rate of adoption, therefore, hinges on creating relative value out of the technology.

Consequently, viable ecosystems emerge around the technology: “Without the ecosystem, the

technology itself is just sitting in a lab.”

Another significant challenge is how to settle around standards that all the industry

players will adopt. There are consortiums such as the R3 consortium and the Ethereum alliance.

They sometimes call themselves a financial institution or a standard, but the adoption of which is

not unanimous. For example, “Goldman Sachs used to be part of R3, then they left later probably

because they have different goals.”

There are several adoption challenges related to maintenance and governance: “In a

private blockchain network, who should be an admin?” “If any dispute occurs, who resolves it?”

“Who manages the blockchain infrastructure?” “If a new version is out, who is responsible for

release management?” These are the type of challenges financial executives must think about

when planning to adopt blockchain technology.

A participant explained a framework for adopting blockchain smart contracts in which

blockchain technologies could be used for two types of smart contracts. The first type is a simple

encounter smart contract that is evoked repetitively. The second type is relationship smart

contract that attempts to solve ongoing equivocal problems that might need intermittent human

interaction. As such, the adoption of blockchain smart contracts becomes more accessible by

thinking about them as partially automated: “Enabling them to get on with the job as much as

possible and to only interact with them when needed.” As such, smart contracts could be adopted

faster by making a conscious decision to “codify more into the automatic part and less into the

human part. To solve an equivocal problem, it might need more human assistance.”

A participant recommended adopting blockchain technology in a controlled way: “As a

banker, rather than jump in, which could bring numerous problems I could not think of, I would

cautiously watch the technology as it matures, then adopt it in a controlled way. Banks deal with

billions of dollars. The accountability and penalties are extremely high.” Some participating

consultants offer a strategic path for adoption: “The technology is evolving and improving so fast.

So, it is a strategic decision to invest now while it is still developing to gain a head start.”

The summary of this section is found in Table 9.

Table 9: Industry Perceptions of Adoption Issues

Adopting blockchain

technology reduces reliance

on central authorities that

may charge service fees

It is hard for financial

institutions to adapt to

collaborating and sharing

information with competitors

Invest early while

blockchain technology is

still developing to gain

competitive edge

The growth of

blockchainbased startups

forces incumbents to

innovate and

reduce transaction costs

Financial institutions will

unlikely invest heavily in

blockchain technology before

it is mature

Demonstrate tangible

relative value of blockchain

technology projects and

consortiums

Adopting blockchain

technology reduces opacity,

increase speed, and

democratizes users’ data

It is hard to settle on standards

for blockchain transactions

that all industry players will

adopt

Align blockchain

technology with established

systems while exploring

radical innovative ways

Partial adoption of

cryptocurrency reduces

friction and increases a

nation’s GDP

The benefits of adopting

blockchain for internal

transactions are not clear

Adopt blockchain

technology in a controlled

way

The dichotomy between

privacy and transparency is

a business decision, not a

technical limitation

Device sound plans for

governance and

maintenance of the

blockchain

V THEORY: TRANSACTION COST ANALYSIS

In this chapter, we add a theoretical perspective on the impact of blockchain technology

on financial transactions by applying transaction cost theory to analyze the insights from our

literature review and stakeholder perceptions. Tapscott and Tapscott (2016) provide a general

transaction cost analysis of blockchain technology independent of industry. We build on and

extend their work by presenting a transaction cost analysis for financial transactions.

Specifically, we explore the transaction cost theory activities comprising searching, bargaining,

and controlling (monitoring and enforcement) (Hennart, 1993; Husted & Folger, 2004;

Williamson, 1985) to shed light on how the adoption of blockchain technology will affect the

transaction costs related to asset verification, record keeping, and data privacy. We also go

beyond the analysis of Tapscott and Tapscott (2016) by examining not only where blockchain

technology attenuates transaction cost but also where it increases transaction cost. Finally, to

compare transaction costs between traditional technologies and blockchain technology, we

assume that the blockchain network is already up and running. This assumption allows us to

avoid the complications in comparing sunk costs that are related to established technologies with

implementation costs that are related to deploying blockchain technology.

Transaction cost theory is concerned with the costs of transactional activities that are not

directly attributed to the production of goods and services but are instead associated with the cost

of searching, bargaining, and controlling activities that accompany the transaction of goods and

services (Husted & Folger, 2004). Owed to the benefit of competition, transaction cost theory

assumes a priori that markets are more efficient than hierarchies (Geyskens et al., 2006) and then

moves on to define when hierarchies are better. Coase (1937), the founder of transaction cost

theory, established that vertical integration into hierarchies applies when transaction costs are

lower compared to the forces of free markets. The theory was further developed by Williamson

(1985) specifying contracting between the firm and its stakeholders—customers, employees,

partners, creditors, and suppliers—as the focus of analysis (Milgrom & Roberts, 1992).

According to Ouchi (1980), transaction costs appear primarily due to the difficulty of

evaluating the goods or services that are transacted. As such, transaction costs in Ouchi's view

are due to activities that advance the goal of guaranteeing the expectations of the exchange

participants. He further posits that the difficulty in achieving such a goal may be attributed to

lack of trust between the parties. Williamson posits that transaction costs are determined by:

1) Frequency, meaning how often a contract is invoked (Milgrom & Roberts, 1992; Williamson,

1979).

2) Asset specificity, referring to whether the asset could be deployed to a different purpose

(Husted & Folger, 2004; Klein et al., 1978; Williamson, 1979), and therefore, raising the

concern of goal incongruence (Ouchi, 1980) which is defined as the degree to which parties

to an exchange have incompatible objectives (Husted & Folger, 2004).

3) Uncertainty, comprising ex ante difficulties of anticipating all future scenarios, language

equivocality (Milgrom & Roberts, 1992; Williamson, 1975), and ex post performance

ambiguity concerning the difficulty of measuring performance (Ouchi, 1980) or in other

words, the metering problem related to the intricacy of assessing the level of contribution of

each individual or entity to a joint effort (Alchian & Demsetz, 1972; Husted & Folger, 2004;

Milgrom & Roberts, 1992).

4) Bounded rationality, positing that people have limited ability to store, process, and retrieve

information (Simon, 1955; Williamson, 1973).

5) Opportunism, exemplified by dodging duties, breaching agreements, and stealing (Alchian &

Demsetz, 1972; Husted & Folger, 2004; Williamson, 1979).

V.1 Searching

Searching costs involve ex-ante activities (Husted & Folger, 2004) that are related to

gathering information to support transactions such as identifying counter partners (Dyer, 1997),

verifying assets, searching for information related to KYC, and gathering reputation data to

assess credibility. Tapscott and Tapscott (2016) list three distinctive characteristics concerning

blockchain technology search: 1) in a blockchain realm, the user can control the level of their

privacy, 2) unlike the Internet which tends to present information that is unreliable, perishable,

and abundant, blockchain information is tamperproof, permanent, and not as abundant, and 3)

information on a blockchain is not just a snapshot at a specific time, it is a chronological account

or a state machine in the words of Mougayar (2016). As such, we proceed to cover how each of

the above blockchain technology attributes affects the searching cost in financial transactions.

First, from a data privacy perspective, by virtue of blockchain technology empowering

customers to control their data, customers can enter their correct expansive identity record

elements, hence, arguably increasing its veracity and richness. Consequently, credit reporting

agencies would not need to extensively search multiple data sources to draw an accurate view of

the customer’s profile. In this way, the cost of searching blockchain is lower in terms of human

power and effort since credit reporting agencies do not have to search disparate data sources that

might have a lower quality of records or conflicting records of information. As such, it is helpful

to service providers who according to Guo and Liang (2016) suffer from poor quality of records

needed for assessing individual credit. Hence, Guo and Liang posit blockchain technology could

decrease ‘searching’ transaction costs related to credit information. On the other hand, it is also

arguable that due to opportunism, users being in charge of presenting their own data may falsify

their records or be less transparent about them. Consequently, searching risk costs could increase

by requiring more expenditure in searching multiple reputational elements to arrive at

appropriate user risk profile assessments. Since users of a blockchain, especially a public one,

could be pseudonymous, the cost for searching users’ private data could also increase in this case.

Moreover, some of the data entered by the users could be encrypted making it impossible to

search or use without the permission of the user, thus, incurring additional searching costs. In a

blockchain, the data is phenomenally secure and conserved; however, if someone loses their

private keys, then there is not a way to retrieve the password. Consequently, it is plausible that

users who lose their private keys would create new identifications, and therefore, generate

multiple profiles, resulting in increased costs of searching due to duplications and fragmentation

of their data. Searching costs could also increase if people, empowered by blockchain

technology, choose to monetize their identity data and their content data. In any case, Workie and

Jain (2017) posit that blockchain technology eases customer identity management due to its

shared, centralized repository.

Second, blockchain records are tamperproof, permanent, and less abundant. Being

tamperproof attenuates the likelihood of opportunistic behavior exemplified by participating

entities attempting to falsify records, therefore, increasing the cost of searching for data elements

to verify assets and keep records. When the information is less abundant it decreases the effect of

bounded rationality, and consequently, reduces searching cost for asset verification and record

keeping, as well as the search of users’ private data—a similar conclusion reached by Williamson

(1975) who avers that the ease of verification is critical to the operation of capital markets. One

of the reasons blockchain records and private data are permanent is immutability. Immutability of

the blockchain records increases the fidelity of the information on the blockchain. Once a search

for a particular record at a specific timestamp is run, the results will always be valid. Therefore,

no costly repetitive search is needed. In addition to immutability, the permanence of blockchain

data is also guaranteed by the nature of its distributed ledger, since, compared to centralized

databases, blockchain ledger is more reliable and fault-tolerant owed to the clones of its ledger

that is maintained by multiple network nodes (Mori, 2016). If most of the network nodes go

down, the network will continue to verify records uninterrupted since the database is available in

many other nodes and the consensus mechanism is independent of the number of operational full

nodes. Therefore, the built-in redundancy could significantly reduce the risk of losing records

and private data (Rechtman, 2017). As such, the cost of inability to search records is reduced

owed to lack of risks of downtime due to failure or congestion.

Third and finally, blockchain is a state machine, meaning that events or records are

chronologically and immutably documented on the blockchain ledger. In this context,

immutability means it is impossible to correct past records on the blockchain. As such, the

immutability of records and private data could increase searching cost since one has to search for

the latest update of the record, which could have multiple versions of it. This is especially true in

a public blockchain where a high degree of goal incongruence could make editing a past

blockchain record extremely difficult since it requires the consensus of many participants. In

private blockchains, goal incongruence is arguably less, hence, it might be easier for participating

entities to align around a protocol on how to edit or purge records.

To illustrate searching transaction costs analysis, we turn our attention to two financial

transaction activities: record reconciliation and KYC. Blockchain technology could significantly

help record reconciliation—a combination of asset verification and record keeping. The savings

in searching costs associated with reconciliations are significant as corroborated by the

stakeholders perspective asserting that blockchain technology would help reconciliation: “Let us

take Apple shares for example. At any point in time, we need to know who has assets or equity in

Apple because we need to have the correct info to be able to pay dividends, taxes, tax rates, etc.

Keeping track of that is very tricky. Therefore, reconciliation is very complex, and something

takes long. That is where blockchain technology might make a difference.” According to

Rechtman (2017), to guard against fraud and errors, financial custodians keep records

independently (Figure 8). Therefore, it is necessary to search the records of all custodians and

compare them to make a manual judgment call concerning a reconciliation decision. Assuming

individuals and parties are opportunistic, have different goals, and act with bounded rationality,

searching for reconciliation is costly. Contrarily, the veracity of the data on a blockchain is

automatically corroborated by all nodes of the network and is shared as a single truth across the

whole network. When recording an asset, the whole blockchain network automatically

corroborates the new entry. Consequently, record reconciliation becomes a seamless activity.

Therefore, blockchain technology significantly attenuates searching activities vis-à-vis record

reconciliation.

As a second illustration, the annual costs of KYC due diligence per bank are up to 500

million dollars (Moyano & Ross, 2017) and Guo and Liang (2016) stress the difficulties faced by

financial institutions in meeting KYC compliance requirements. Along the same lines, our

participants suggested that blockchain technology could significantly reduce searching costs

related to KYC: “Blockchain technology is a fantastic way to comply with KYC. All you have to

do is to put the data on the blockchain, and anyone can use an App to verify.” However, some of

the participants argued that blockchain technology will change the nature of searching where

KYC in the future “will mean who is downloading the information, what is the serial number of

the device, to who is the device registered, and so on.” In this case, financial institutions would

have to crawl these different pieces of information to stitch them together to get a reasonable

picture of the customer, arguably increasing searching costs. Some participants suggested

blockchain technology might even shift the KYC burdens from financial institutions to

government authorities. If this prediction transpires, it would mean increased searching costs for

the authorities, but reduced searching costs for the institutions. It is unclear whether the KYC due

diligence will remain with the banks or shift to the authorities; however, it is likely that the

nature of searching for KYC information will change with blockchain technology. Further

searching costs could be incurred due to pseudonymous behavior by some customers as we have

explained earlier in this section. Table 10 summarizes searching transaction costs related to

blockchain-enabled financial transactions.

Table 10: Searching Transaction Costs

Attenuated

transaction

costs

Immutability of the blockchain records increases the fidelity of its

information

Blockchain technology allows users to enter their own correct expansive

identity data elements allowing credit agencies to reduce the need to

corroborate data from multiple sources

Blockchain data is less abundant resulting is reducing the effect of bounded

rationality

With blockchain technology, searching and verifying assets are redundantly

reliable and accessible

Blockchain technology eliminates the need for searching to reconcile records

Blockchain technology could significantly reduce searching costs related to

the current KYC process

Increased

transaction

costs

Immutability of blockchain data makes it difficult to correct past records

Users in charge of their own data may opportunistically falsify their records

or be less transparent about them

Users of a blockchain, especially a public one, could be pseudonymous

Some of the data entered by the users could be encrypted

Users of a blockchain could choose to monetize their identity and content

data

Blockchain is more prone to the duplications and fragmentation of users’

profiles when users lose their private keys

If the nature of KYC changes by blockchain technology, financial institutions

or authorities would have to crawl more pieces of information

V.2 Bargaining

Bargaining transaction costs are related to negotiating, contracting, determining, devising,

and arranging the steps to be taken and the terms of exchange when conducting business with

others (Dyer, 1997; Husted & Folger, 2004; Milgrom & Roberts, 1990). As such, in a

blockchain-based financial transaction realm, bargaining takes place with customers concerning

matters of access to private data and services and with partners when cooperating on a shared

blockchain—partners could be collaborators or competitors. Accordingly, we proceed to cover

three areas to examine the differences between bargaining costs with or without blockchain

technology. The areas are bargaining with partners, bargaining with customers, and smart

contract as a prominent blockchain native feature that is specially related to bargaining.

First, we examine partnering bargaining costs. Workie and Jain (2017) suggest that

blockchain technology is helpful where financial transactions involve multiparty in areas such as

repurchase agreements when there are risks of settlement failure—an assessment corroborated by

participants: “Blockchain technology brings down transaction costs for large multiparty

transactions where many institutions and people come together such as stock exchanges and the

DTCC.” In a blockchain realm, partners share a ledger with predefined consensus mechanism,

agreed upon shared records, and code-based asset verification process. Consequently, the

blockchain environment has reduced frequency, higher goal congruence, lower performance

ambiguity, and less effect of bounded rationality. Therefore, parties sharing a blockchain enjoy

attenuated bargaining costs of negotiation and renegotiations: A participant aver that the

technology “supports transactions across geographical distances without a very heavyweight

institutional arrangement.” Moreover, if the shared ledger was designed with high level of

transparency, the result is further reduced performance ambiguity and opportunism since

negotiations between partners are anchored on accurate records and realistic expectations.

Arguably, the reverse holds true—a blockchain that emphasizes privacy results in higher

performance ambiguity and opportunism. Therefore, we conclude that the higher degree of

transparency of a blockchain, the less the transaction bargaining costs. To illustrate, we revisit

our ‘proof of insurance’ earlier example. The policy blockchain is a private blockchain

“accessible by participating insurance carriers, insurance distribution firms, and brokers.” It

uses ‘proof of authority’ as a consensus mechanism—the level of access is based on the user’s

identity. In this case, insurance carriers require significantly less bargaining effort to be able to

settle an accident between two of their policyholders.

Second, we examine bargaining with customers. Inasmuch as blockchain users are able to

control their data, additional bargaining costs between the customers and the financial institutions

are expected so as to be able to convince customers to share their information, or even buy the

information in the case of some customers desiring to monetize their identity information: “Self-

sovereign identity means if it is my identity, I should be empowered to share it with whomever I

want, whenever I want, but only limited to whomever I want.” Since we have concluded earlier

that the ability of the users to control their information will improve the veracity, richness, and

access to their private identity data, it is arguable that due to decreased uncertainty, bargaining

costs between customers and financial institutions will decrease. For example, credit and

insurance rates are easy to bargain provided accurate, rich, semi-real-time telemetry data based

on accurate user profile data or drivers record. It is also plausible that the richness of private data

and the flexibility to share which type of private data elements will result in a decreased asset

specificity of the user’s identity data elements a product in itself. Therefore, bargaining

transaction costs will decrease.

Finally, smart contracts is a prominent native feature of blockchain technology—digitally

drafting and automatically enforcing transactions instead of arduous human interventions (de

Meijer, 2015; Yli-Huumo et al., 2016; Zhao et al., 2016). A contract is “a framework that is a

highly adjustable and almost never accurately indicative of real working relations, but a guide in

cases of doubt or conflict” (Llewellyn, 1931; Williamson, 2008). Williamson posits that contracts

are never complete due to 1) environmental uncertainty owed to the unpredictability of future

contingencies (Geyskens et al., 2006), 1) behavioral uncertainty stemming from performance

ambiguity ex-post (Milgrom & Roberts, 1990), 3) language equivocality where the more detailed

the contract, the more likely it contains ambiguous clauses (Milgrom & Roberts, 1990), and 4)

bounded rationality (Simon, 1955; Williamson, 1973). Compared to traditional contracts, when

constructing a smart contract, heftier negotiation costs obtain since smart contracts are code-

based with less room for future flexibility needed to accommodate for future uncertainty,

bounded rationality, and challenges concerning the conversion of equivocal language into

algorisms (Simon, 1955; Williamson, 1973). Therefore, with a smart contract people might be

more reluctant to commit to a code-based that is perceived to be a rigid contract, and if they do, it

will take significant effort to agree to the terms and the translation of the terms into an algorithm.

Furthermore, since a smart contract has to account for every scenario, it is arguable that more

burdensome upfront negotiations costs obtain. Nonetheless, once a smart contract is deployed, no

future renegotiations costs are expected, and therefore, not costs of renegotiations are incurred.

To summarize, Table 11 illustrates the bargaining transaction costs as they relate to the impact of

blockchain technology on asset verification, record keeping, and data privacy.

Table 11: Bargaining Transaction Costs

Attenuated

transaction

costs

In a blockchain realm, partners share a ledger with predefined consensus

mechanism, agreed upon shared records, and code-based asset verification

process

It is possible to design a blockchain with a high level of transparency

The ability of the users to control their information improves the veracity,

richness, and access to their private identity data, leading to a decreased

uncertainty

The richness of blockchain users’ private data and the flexibility to share

which type of private data elements results in a decreased asset specificity of

the user’s identity data elements

Blockchain smart contracts require no future adjustments

Increased

transaction

costs

It is possible to design a blockchain with a high level of privacy

Inasmuch as blockchain users are able to control their data, financial

institutions need to convince customers to share their information or even

offer to buy

Preparing a smart contract requires heavy bargaining costs

V.3 Controlling

Control costs are ex-post transaction costs related to monitoring and enforcing

predetermined obligations to ensure their fair fulfillment or to respond to the breach thereof by

any party (Husted & Folger, 2004; Milgrom & Roberts, 1992). In a blockchain-based financial

transaction ecosystem, control costs comprise costs such as tracking assets, monitoring records,

ensuring the protection of private data, enforcing AML laws, and policing the execution of

financial contracts.

We first explicate the reasons blockchain technology could be designed as a readily

transparent control platform (Workie & Jain, 2017; Yli-Huumo et al., 2016), hence affecting the

controlling costs of auditing, monitoring (Kiviat, 2015), and enforcement requirements and

practices desired by financial institutions, government authorities, and regulatory bodies. First, as

we have explained earlier, blockchain timestamps events and records (Crosby et al., 2016). As

such, owing to the dimension of chronology, it impacts control ling costs due to the effects on

performance ambiguity, opportunism, and bounded rationality. Second, by design, blockchain

transactions are immutable and tamperproof (Mougayar, 2016; Wang et al., 2016), thereby,

affecting opportunism. Third, blockchain ledger is “centralized and fully decentralized at the

same time,” thus, impacting goal incongruence and asset specificity. Fourth, blockchain

technology employs code-based consensus mechanisms (DuPont & Maurer, 2015; Mori, 2016),

and consequently, impacting controlling costs determinants of frequency, goal incongruence, and

performance ambiguity. Finally, blockchain technology has smart contracts as a native feature

(Auctus_Team, 2017; Mougayar, 2016), therefore, impacting the effects of frequency,

uncertainty, bounded rationality, and opportunism. Next, we cover each one of the above

attributes in relation to financial transactions controlling costs.

First, the impact of timestamping on transaction controlling costs could be explicated by a

scenario where a customer initiates a transaction to buy a specific financial asset. Owing to the

timestamp of the event and the timestamp of the value of the asset, it would be possible to

crossverify the value of the asset at that exact timestamp, and therefore, less transaction

controlling costs are incurred due to the reduction of opportunism—where, for example, the

seller could opportunistically claim an asset value at a different timestamp—or bounded

rationality behavior. Likewise, user private data is readily available to be visualized as time

series, hence, reducing the costs of monitoring activities stemming from performance ambiguity.

Second, by design, blockchain transactions are immutable and tamperproof. Any

opportunistic modification of the historical data record is detectable by participating blockchain

network nodes (B. Lee & Lee, 2017; Tapscott & Tapscott, 2017). Evidence that is tamperproof

reduces litigation transaction costs incurred by parties that are involved in a dispute.

Furthermore, immutability leads to traceability (Mori, 2016) due to the verifiability of every

record ever transacted on a blockchain (Crosby et al., 2016). Contrarily, in blockchains with a

high level of privacy such as Monero, and Zcash, pseudonymous behavior by users could raise

the costs for authorities to control illicit activates such as AML. On the other hand, blockchain

being immutable, it is arguable that controlling costs associated with blockchain exchanges are

less than cash exchanges since a permanent trace of activities on the ledger could be

discouraging to criminals (Tapscott & Tapscott, 2016). From the regulators perspective, they are

“used to work through the banks.” In a blockchain world, regulators might absorb the burden of

enforcing the prohibition of activities such as money laundering. In such cases, financial

institutions would enjoy less controlling transaction costs while the authorities would incur

additional transaction controlling costs.

Third, blockchain ledger is “centralized and fully decentralized at the same time.” As

such, it has built-in redundancy leading to less transaction controlling costs attributed to the loss

of access due to network downtime or congestion. Moreover, a blockchain ledger is a single

source of truth (Pilkington, 2015) that is shared across the whole network. Therefore, monitoring

costs are reduced owed to a reduced asset specificity of its data that is accessible by all

authorized participants. However, in a blockchain environment, sharing data between partners,

and sometimes competitors, is essential. For instance, “it does not matter how good the proof of

insurance is if it is one-sided.” Hence, further transaction controlling is needed to monitor the

‘proof of collaboration’ meta-records: “One of the first hurdles that we had was to be able to

prove that these competitors could come together on these various solutions and work together.”

Fourth, blockchain technology employs code-based consensus mechanisms (DuPont & Maurer,

2015; Mori, 2016). As such, less transaction controlling is needed due to the attenuation of the

effects of bounded rationality and language equivocality. Furthermore, the blockchain records are

also corroborated by other full nodes in the network continuously verifying the validity of every

new block and the overall integrity of the whole ledger. As such, the built-in and code-based

automation reduce manual efforts to achieve the same with traditional setups. Moreover, if

‘monitoring’ is considered as a skill, the generality of blockchain code-based capability reduces

the asset specificity compared to more traditional monitoring procedures. Similarly, the current

processes of digital payments and currency transfers require heavy consumption of human and

infrastructural assets of financial institutions that act as intermediaries to conduct, clear, and

settle transactions (Yli-Huumo et al., 2016). With a public blockchain, parties can exchange

directly over the network, utilizing encryption and consensus mechanisms (Guo & Liang, 2016;

Tsai et al., 2016; Zhu & Zhou, 2016) with thinner layers of intermediaries and less involvement

of external judicial systems to monitor and enforce the fairness of value exchanges. To illustrate,

blockchain technology can enforce ownership by virtue of a consensus mechanism (Workie &

Jain, 2017) that is already agreed upon by all participants, and therefore, reducing the transaction

enforcement costs.

Fifth and lastly, we examine controlling costs for smart contracts. In the ‘Bargaining’

section we have examined smart contracts ex-ante bargaining costs provided environmental

uncertainty and the difficulties vis-à-vis the translation of equivocal language to code. If we

assume a smart contract is already appropriately coded and deployed, it is arguable that the smart

contract would significantly attenuate the monitoring, enforcement, and litigation controlling

transaction costs. In general, contractual disputes represent a significant share of litigations in the

US and the UK—44 percent and 57 percent of the cases respectively (Swan, 2015; Swanson,

2014). Accordingly, Tapscott and Tapscott (2016) assert that smart contracts could

disintermediation the law profession.

The current financial transaction controlling process is slow and semi-manual. If replaced

by blockchain technology, the ensuing elevated transparency could aid both regulators and

participants currently struggling to conduct and monitor the intricate post-trade records and

activities (Workie & Jain, 2017). Blockchain technology can natively, seamlessly, and more

transparently afford robust audit trails of records of dividend disbursements, ownership details,

stock split terms, stock transactions timestamps, taxes reports, and compliance reporting

requirements (Rechtman, 2017). Therefore, financial institutions and regulators could build

collaborative platforms that would reduce the transaction controlling costs required by the

regulators from financial institutions: “It is a big arduous task for them to gather that information

across various back office systems. If you have the information on the blockchain, you could very

easily create a use case to do all that regulatory reporting very quickly and cut out many working

hours required for that.”

Finally, a blockchain could traverse multiple jurisdictions which could be “confusing

because the beauty of decentralized networks is not having borders, although we still have

borders and live in physical places. There are rules and taxes that we cannot just end on a dime.”

Therefore, applying these multijurisdictional laws contributes to the transaction enforcement

costs. For instance, the nature of privacy-related regulations “varies greatly from country to

country, from Estonia where everything is on blockchain, to countries where they will take many

years before doing anything.” Table 12 summarizes the financial transactions

controlling costs.

Table 12: Controlling Transaction Costs

Blockchain timestamps attenuate the effects of bounded rationality,

opportunism, and performance ambiguity

Attenuated

transaction

costs

Blockchain immutability affords evidence that is tamperproof

Blockchain immutability increases traceability and verifiability

In a blockchain world, financial institutions might get rid of the burden of

being required to enforce the prohibition of activities such as money

laundering

Blockchain has built-in redundancy

Blockchain shared ledger has a reduced asset specificity

Blockchain code-based consensus mechanism attenuates the effects of

bounded rationality and language equivocality

In a blockchain environment, monitoring records validity and network

integrity are built-in, code-based, and less asset specific

Blockchain technology affords thinner layers of intermediaries and less

involvement of external judicial systems to monitor and enforce the fairness

of value exchanges

Smart contracts significantly attenuate the monitoring, enforcement, and

litigation controlling

Blockchain can natively, seamlessly, and more transparently afford robust

audit trails of records

Increased

transaction

costs

A blockchain with a high level of privacy raises the cost for controlling illicit

activates

In a blockchain world, government authorities might absorb the burden of

prohibiting things such as money laundering

In a blockchain environment, there is a need to share data between partners,

and sometimes competitors

For a blockchain crossing multiple jurisdictions, there is a need to enforce all

global laws covered

VI DISCUSSION

Blockchain is an integrative meta-technology characterized by a decentralized and

distributed single truth ledger, immutable and tamperproof data records, code-based consensus

mechanisms, time-stamped records, peer-to-peer transmission, built-in cryptography, and native

applications such as smart contracts (Mougayar, 2016; Wang et al., 2016). Motivated by its

potential to reduce the costs and improve the performance of financial transactions, the

technology has been touted as the innovation engine for the financial industry (de Meijer, 2015;

Guo & Liang, 2016; Zhao et al., 2016). With its introduction, it is possible to verify assets, keep

records, and protect data in a decentralized fashion with less friction and fewer loci of control

(Yli-Huumo et al., 2016). As such, financial institutions are increasingly interested in the

technology (de Meijer, 2016).

Against this backdrop, this dissertation contributes to the body of knowledge concerning

the impact of this emerging phenomenon on asset verification, record keeping, data privacy, and

transaction costs. To achieve our goal, we have employed a pluralist methodology that develops

and contrasts a review of the literature, an analysis of the perspectives of key industry players

and observers, and a theoretical interpretation through the lens of transaction cost theory (Coase,

1937; Ouchi, 1980; Williamson, 1975). By discussing and synthesizing these different

perspectives in the following, this dissertation offers a number of specific contributions to the

body of knowledge related to the impact of blockchain technology on financial transactions.

VI.1 Blockchain Technology Can Enable Asset Verification, Record Keeping, and Data

Privacy

Enabled by the characteristics of its ledger, network, and protocol, blockchain technology

can facilitate asset verification and records keeping (Workie & Jain, 2017) in a manner agreed

upon by all participants. The network has a high level of goal congruence engendered by its

nodes corroborating to verify the validity of new information and the overall veracity of existing

records (Mougayar, 2016). No single custodian can exercise opportunistic control over the

blockchain ledger at any time (Rechtman, 2017). The ledger is, therefore, a single truth that is

redundantly distributed across the network enabling asset verification and record keeping with

high integrity and accessibility. As such, blockchain technology eliminates the need for the

current semi-manual processes where multiple custodians keep records in disparate databases

and where each financial institution verifies assets on its own. Consequently, for blockchain

participants, asset reconciliation becomes automatic since the ledger has a single shared

preagreed upon truth at any particular timestamp. This is of significant value because asset

verification and record reconciliation consume much of the financial institutions’ resources: “We

need to have the correct info to be able to pay dividends, taxes, tax rates, etc. Keeping track of

that is very tricky. Therefore, reconciliation is very complex, and something that takes long. That

is where blockchain technology might make a difference.”

Data privacy and transparency are two desired outcomes, but sometimes they conflict.

The tradeoff between privacy and transparency is a business decision concerning the balance

between confidentiality and verifiability. A blockchain network could be designed to enable the

desired balance between transparency and privacy (Narayanan et al., 2016; Yli-Huumo et al.,

2016). The level of data privacy and transparency depends on factors such as the agreed upon

policy regarding the pseudonymity of the users, whether the data is stored using encryption, the

access control scheme, and whether the blockchain network is public, private, hybrid, or

permissioned. Moreover, blockchain users could control their “Self-sovereign identity” data

(Tapscott & Tapscott, 2016) leading to the improvement of its veracity and richness, and

therefore, reducing its asset specificity.

These insights were corroborated by our literature review and empirical data and were

further supported by our theoretical analysis.

VI.2 On Balance, Blockchain Technology Can Lower Financial Transaction Costs

In alignment with our theoretical analysis we focus on ‘transaction theory’ costs and

further support our argument pluralistically with our literature review and empirical data where

transaction costs takes a broader meaning of ‘transaction theory’ costs and production costs

(Dyer, 1997; Zajac & Olsen, 1993), in addition to transition costs. As such, we proceed to discern

the impact of blockchain technology on searching, bargaining, and controlling costs.

First, considering searching costs, the ability of blockchain users to enter their own

identity data increases the integrity and richness of the ledger. Therefore, significantly reducing

searching costs for credit reporting data. Contrarily, pseudonymity behavior, encrypting records,

and falsifying own records increase searching costs. However, it is less significant assuming

users’ reputational data is important to them to receive financial transaction services.

Furthermore, blockchain searching attributes increase the fidelity of the information and

significantly reduces searching costs. On the other hand, the need to search for multiple versions

due to immutability could be solved technologically. Our pluralistic findings detailed KYC and

asset reconciliation as two major exemplars where blockchain technology positively attenuates

transaction searching costs.

Second, related to bargaining costs, blockchain tenants share a pre-agreed upon

codebased and transparent ecosystem. This significantly reduces the negotiation and

renegotiation costs since bargainers are anchored on correct information. We argue that

blockchains with more focus on privacy will be less profuse since the quest for transparency

drives the value proposition of building a blockchain network. The ‘proof of insurance’ example

drawn from our empirical data supports this conclusion. Indeed, there is a possibility that some

users might try to monetize their identify data, therefore increasing bargaining cost. Nevertheless,

it is less likely there will be many such users for reasons explained above. Certainly, negotiating

smart contracts could significantly increase bargaining costs. Nonetheless, these bargaining costs

are less significant compared to the savings on the controlling costs.

Third and finally, we consider controlling costs. The ability to design a blockchain as a

readily transparent controlling platform (Workie & Jain, 2017; Yli-Huumo et al., 2016)

significantly reduces controlling costs (Kiviat, 2015) as shown by the long list of where

blockchain technology attenuates controlling costs—Table 12. The few areas where blockchain

technology increases cost are of less significance based on the following argument: a) we have

already addressed private blockchains above b) the scenario of the authorities absorbing KYC

and AML compliance requirements is merely a matter of shifting costs away from financial

institutions, c) the need for monitoring the sharing of data between partners could reduce over

time as goal congruency increases, and d) enforcing all global laws covered by a blockchain

network might be of significance, but not too different compared to traditional technologies.

Therefore, we conclude that, on balance, blockchain technology attenuates transaction

costs.

VI.3 Blockchain Technology Furnishes a Reporting Platform for Financial Transactions

The findings from our pluralistic method concur that blockchain technology could

potentially be the platform for reporting activities for financial transactions. Owed to

immutability and decentralization, the permanence of blockchain data (Narayanan et al., 2016)

makes it a reliable platform to keep important records indefinitely. The events are verifiable and

traceable due to their timestamps (Crosby et al., 2016; Tapscott & Tapscott, 2016). Furthermore,

corroborated by the whole network (Rechtman, 2017), data on a blockchain ledger attains a high

level of integrity and veracity. With its built-in cryptography, data privacy and access control are

built-in capabilities. Besides, its native applications such as smart contracts (Mougayar, 2016;

Wang et al., 2016) could enable process automation. As such, blockchain technology can

natively, seamlessly, and more transparently afford robust audit trails of records of financial

transactions (Rechtman, 2017) with minimal transaction costs.

As a readily available reporting infrastructure (Workie & Jain, 2017), blockchain

technology is impactful to auditing and monitoring (Kiviat, 2015) requirements and practices

desired by financial institutions and regulatory bodies. The platform could enable financial

institutions to exchange reports among themselves, as well as with authorities in compliance with

regulatory requirements: “It is a big arduous task for them to gather that information across

various back office systems. If you have the information on the blockchain, you could very easily

create a use case to do all that regulatory reporting very quickly and cut out many working hours

required for that.”

VI.4 Blockchain Technology Requires Approaching Financial Transactions Differently

Blockchain technology is greater than the sum of its parts (Mougayar, 2016). Thus, it is

both a technological and economic innovation that offers a platform to record transactions and

share data between participating parties in a more efficient, transparent, and verifiable manner

(Liebenau & Elaluf-Calderwood, 2016; Lindman et al., 2017; Workie & Jain, 2017). The

technology reshapes centricity and reshapes governance (Guo & Liang, 2016). Synthesizing the

perspectives of our literature review, empirical data, and theoretical analysis, we found the

following six aspects about blockchain-based financial transactions that behoove managers to

approach financial transactions differently when considering blockchain technology.

First, a blockchain network is a multitenant environment. Its value proposition obtains

when the ecosystem is a decentralized multiparty that would benefit from an engendered trust. To

be successful, blockchain participants should do away with isolated data records and share

information on the blockchain ledger to enhance reputability, accountability, and controllability

(de Meijer, 2015) by computationally, efficiently, and seamlessly keeping records across the

financial value chain (Kiviat, 2015). In this way, blockchain participants are enabled to work

with high level of goal congruence and low level of performance ambiguity.

Second, blockchain records alter the nature of financial transactions and their transaction

costs since they a) attain further veracity over time (Narayanan et al., 2016), therefore, redefining

traditional concepts such as the finality of settlements (Mori, 2016), b) are immutably

corroborated by the whole network, c) are secure, but could raise security issues of different

nature, d) could be made accessible to only the intended audience, and e) are chronological

accounts of events (Tapscott & Tapscott, 2016).

Third, the technology could expand the richness and reach of financial transaction

services (de Meijer, 2015). Nonetheless, much of the gain would not be owed to the automation

of current processes, but to the development of new business models (Mori, 2016; Workie &

Jain, 2017). An extreme exemplar could be the emergence of DAOs—organizations with

selfgoverned operations and user-produced value creation and rewards (Mougayar, 2016).

Fourth, blockchain technology enables individuals to assume controls of their privacy

aspects (Nakamoto, 2008). Tapscott and Tapscott (2016) further posit that not only would

blockchain technology furnish a flexible means for individuals to control and protect their data,

but also to monetize their identities and personal information. The implications were

demonstrated in our empirical and theoretical analysis, and are exemplified by the potentially

significant impact on credit reporting industry.

Fifth, the current financial transaction regulations that have been tailored for a “financial

ecosystem that we have developed in the past 100 to 200 years” will have to adapt to a different

world. There might be “a need for some extra sort of blockchain sensors” to enable monitoring

financial activities. The nature of compliance requirements such as KYC and AML could become

different. As such, KYC and AML could be expanded to searching and monitoring a network of

vibrant online activities. Moreover, the transaction costs of KYC and AML due diligence might

shift from financial institutions to government authorities.

Sixth and finally, blockchain-based startups will force incumbents to reduce transaction

costs: “Visa and MasterCard are now a duopoly in the payment sector. If we have many other

options then, especially internationally, they have to reduce their fees drastically to remain

competitive.” Therefore, incumbents must invest in exploring blockchain technology since it is

“a strategic decision to invest now while it is still developing to gain a head start.” Moreover,

potentially, blockchain technology could introduce a massive change regarding how we would

interact with capital markets in the form of ICOs.

VI.5 Adoption of Blockchain Technology for Financial Transactions is Uncertain and

Complex

Like all newly introduced technologies, blockchain technology is far from fully charted

waters: “It is so fascinating, and we still do not understand it. We still do not understand some of

the negative.” Disruptive innovations usually surpass the internal absorption and usurpation

capabilities of established institutions (Mougayar, 2016). To successfully transition to blockchain

technology, incumbents and startups will have to resolve the technological, regulatory, adoption,

and transaction hurdles as we found in our literature review, empirical data, and theoretical

analysis.

First, blockchain technology is not yet mature, and therefore, several technological issues

arise. Many financial systems require high throughput, thus, presenting a challenge for

blockchain technology provided its sequential ledger, consensus mechanism, and the need for its

nodes to operate in server-client dual mode (Tsai et al., 2016). Storage requirements are also high

given its ever-growing ledger (Yli-Huumo et al., 2016; Zhao et al., 2016). There are also security

risks such as the 50% attack (Narayanan et al., 2016) and “the risk of losing passwords.”

Immutability makes it “hard to go back and modify the record because one has to get agreement

from everyone.” Moreover, its built-in redundancy comes with the price of taxing computational

and networking resources. Therefore, the financial industry leaders “are waiting until blockchain

technology is mature before they spend the money.”

Second, the regulatory framework is still evolving, therefore, adding to the uncertainty

surrounding a relatively new technology: “The largest problem is the regulatory framework.”

Besides, “the regulators themselves do not understand how cryptocurrencies or blockchain

technology works.” Thus far, there are a few compliance requirements concerning asset

verification, record keeping, and data privacy (FINRA, 2017). Furthermore, for a global

blockchain covered by heterogeneous jurisdictions, compliance is further complicated (Mori,

2016).

Third and finally, there are several general adoption issues. For instance, not all

stakeholders appreciate the value proposition of blockchain technology, but some see it as “full of

hype and euphoria with real potential for only a few use cases.” Some believe blockchain

technology will not deliver on all its promises. Many stakeholders, therefore, advocate gradual

adoption: “Rather than jump in, which could bring numerous problems I could not think of, I

would cautiously watch the technology as it matures, then adopt it in a controlled way.” The

decision of when to use blockchain technology versus traditional ones is complex

(Auctus_Team, 2017) and “it is hard to be aware of all the different flavors of blockchains in an

arms race to see who can provide better features.” Sharing a blockchain network requires

participating parties to agree on governance and operational aspects and probably settling around

standards that all the industry players will adopt. It requires effort to integrate the current

multiple interconnected financial systems or replace with blockchain technology. Besides,

although, on balance, blockchain technology attenuates transaction costs, it also increases some

of them—Tables 10-12.

VII REFLECTIONS

Based on our pluralistic methodology, we have uncovered specific areas that pertain to

the impact of blockchain on financial transactions. In this section, we reflect on some general

themes that have emerged through this dissertation.

VII.1 Understanding the Complexity of Designing Blockchains

We have detailed how complex blockchain technology is. As such, the industry needs

guidance to simplify how to design, develop, and organize blockchain-based financial transaction

services (Lindman et al., 2017). To assist with this goal, we emphasize the key dimensions of

blockchains.

Table 5 illustrates a few major categories of blockchains. However, the characteristics of

blockchain technology allow financial institutions to conduct and operate a wide array of

financial transaction services at any point in three-dimensional octants as shown in Figure 9. The

figure shows the three operational axes.

The first axis measures the degree of access control. Access refers to who can write and

read which data on a blockchain. At the lowest end, a blockchain can be unconditionally

accessible by every Internet user (Buterin, 2015; Pilkington, 2015). At the opposite end, access to

an entirely private blockchain is controlled by a central locus of governance (Buterin, 2015;

Pilkington, 2015). The second axis is the degree of privacy. Privacy refers to aspects of level of

encryption and degree of user anonymity (Narayanan et al., 2016; Yli-Huumo et al., 2016). A

blockchain can be designed with a high degree of privacy, a high degree of transparency, or

anywhere in between. The third axis is concerned with the degree of decentralization.

Decentralization refers to several things including the type of consensus mechanism used, the

ownership and distribution of the network nodes, and who participates in coding and

development. Similar to the other dimensions, decentralization is not an ‘all or nothing’

(Narayanan et al., 2016).

Figure 9: Dimensions of Blockchain

Choosing levels of a blockchain access control, privacy, or centralization should be based

on the suitability of the configuration to the business needs rather than on technological

limitations. However, according to Ethereum founder Vitalik Buterin, these choices are subject to

what is called the “blockchain trilemma.” The trilemma states that between security, privacy, and

decentralization, , one can only achieve optimal solutions in two of the three dimensions.

High

decentralization

low

centralization

No access

control

High

privacy

High access

control

High

transparency

VII.2 Applying Transaction Cost to Blockchain Design

We have analyzed blockchain transaction costs related to the activities of searching,

bargaining, and controlling. This exercise proved useful, and there are additional opportunities to

apply transaction cost theory to interpret the blockchain technology phenomenon. As we have

discussed, transaction cost theory assumes a priori that markets are generally more efficient than

hierarchies (Geyskens et al., 2006) and also defines when hierarchies perform better (Coase,

1937). The determinants of the boundaries are frequency, asset specificity, goal incongruence,

uncertainty, bounded rationality, and opportunism (Klein et al., 1978; Milgrom & Roberts, 1992;

Ouchi, 1980; Williamson, 1979).

Akin to the market versus hierarchy dichotomy, the choices of the type of access control,

level of privacy, the degree of decentralization could be analyzed using the above transaction cost

determinants. A typical blockchain is decentralized with multiparty sharing information on the

ledger to enhance reputability, accountability, and controllability (de Meijer, 2015) by

computationally, efficiently, and seamlessly keeping records across the financial value chain

(Kiviat, 2015). However, other configurations are possible, and sometimes desirable.

A highly accessible and decentralized blockchain is extremely immutable, and therefore,

it is not possible to fix a mistake. In this sense, immutability affords traceability and reliability;

nonetheless, it makes it difficult to fix mistakes and human errors. The choice of this

configuration is arguably needed when there are high levels of opportunism and goal

incongruence. A blockchain with high privacy could be the choice of users whose primary

concern is opportunism. A transparent, decentralized, and accessible blockchain could the choice

when transactions are frequent with a low level of asset specificity.

VII.3 Appreciating the Blockchain Ecosystem

For blockchain innovation to permeate, a surrounding and integrated ecosystem needs to

flourish. Blockchain technology alone will not lead to a significant transformation of financial

transactions. For instance, Mori (2016) asserts that 80 percent of the challenges in the financial

industry are associated with business models and processes, and only 20 percent are attributable

to technological hurdles. As such, redesigning processes and coming up with innovative business

models are vital to the success of a blockchain technology paradigm shift. Doing so is not easy

by any means as stated by one of the participants: “Blockchain technology opportunities are

limited because of the way the whole asset industry is structured right now. Change is not

happening, it would require quite a bit.”

The ecosystem comprises a) blockchain-based new entrants to the financial transaction

sector, b) incumbent financial services providers, c) interconnectors between different entities

exemplified by cryptocurrency exchanges, d) technology innovators—incumbents and

entrepreneurs—to supply the market with blockchain-based solutions, and e) regulators to

guarantee compliance and to build the required regulatory framework. In addition, the ecosystem

includes new types of consumers with new aspirations, passion, and demands. In this way,

collaboration and convergent interests are essential to unleashing the power of blockchain

technology.

From a technology stack ecosystem point of view, we envision a future permeated by

machine-to-machine type of transactions pushing the blockchain technology towards the internet

of things (IoT) periphery. Besides, AI is expected to play an important role in adding analytical

capability to blockchain technology. That is especially important for blockchain smart contracts

to become smarter, more dynamic, and more flexible (machine learning type of AI), and more

integrated with big data. The integration of these three technologies could lead to unprecedented,

innovative waves of development.

VII.4 Creating Value with Blockchains

To understand the value creation options owed to blockchain technology, it is worth

revisiting blockchain as a meta-technology that integrates several technologies to form a gestalt

(Kiviat, 2015; Mougayar, 2016)—see Figure 10 which illustrates the main characteristics of

blockchains that we have covered in this dissertation.

Figure 10: Blockchain Gestalt

The original promise of blockchain technology introduced by Nakamoto (2008) was to

bypass middleman actors and allowing direct peer-to-peer transactions, a vision celebrated by

anarchists and alarming to institutionalists. Ten years passed since, and the technology adoption

Decentralized

and

distributed

single truth

Immutable,

tamperproof,

time

stamped

Native

applications

such as smart

contracts

Peer

peer

transmission

Built

cryptography

Code

based

consensus

mechanisms

is shaping in a way that is rather different. Instead of disintermediating, we see the

reintermediation of trust away from the center (Mougayar, 2016) and the formation of

‘multicenter, weakly intermediated’ schemes (Guo & Liang, 2016) exemplified by

cryptocurrency exchanges and blockchain-based escrow services. Many businesses were

established to enable financial transactions and to exchange value. As such, blockchain

technology permits the displacement of older and thicker layers of intermediation with newer and

thinner ones. In doing so, the technology surpasses equivalence in terms of speed of financial

transactions and their cost, level of trust, degree of flexibility, and broadening business models

(de Meijer, 2015; Guo & Liang, 2016; Kiviat, 2015)—not only from a business side, but also

from consumer and regulator sides.

VII.5 Considering Blockchain Applications

Blockchain applications can be categorized in many ways as we have seen in Appendix

B, and Appendix D. We have uncovered three broad areas that are being actively pursued by

financial transactions providers.

The first area of applications is payments. Blockchain technology can reduce the cost of

cross-border transactions, lower annual operational costs, and reduce annual cost of risk (Guo &

Liang, 2016). Besides, the phenomenon of cryptocurrency in itself is destined for more adoption

as exemplified by some countries augmenting their fiat currencies by cryptocurrency. The

payment sector gave rise to new models of financial transaction services such as cryptocurrency

exchanges, digital asset escrow service providers, and different type of cryptocurrency minters.

The exchanges allow end users to swap cryptocurrencies with each other or with fiat currency.

The concern of cryptocurrency being used for illicit activities is countered by blockchain

traceability and the concept of pseudonymity (Tapscott & Tapscott, 2016). In this context,

pseudonymity could be considered as a balance between privacy and transparency.

Second, immutability and timestamps of blockchain data make the technology suitable

for tracking assets and activities with an elevated level of trust in the veracity of assets

information (Crosby et al., 2016; Mori, 2016; Rechtman, 2017). As such, blockchain technology

affords a suitable platform for asset reconciliation (Rechtman, 2017). It is also a suitable system

to achieve compliance auditing services required by regulators (Kiviat, 2015; Workie & Jain,

2017). Moreover, supply chain financial transactions are another major field for blockchain

technology as exemplified by IBM Hyperledger.

The third area is identity management. The capabilities of blockchain in managing

identity are exemplified by its implementation in the country of Georgia. Moreover, the

technology allows “self- sovereign identity” where users have more control over their identity

and their content. Blockchain technology can challenge some of the established identity privacy

norms where individual and the collective—instead of central entities—are in control of

reputational information.

VIII CONCLUDING REMARKS

Asset verification, record keeping, data privacy, and transaction costs are but some few

areas of the financial transaction domain. Moreover, our theoretical framework is but one of

many lenses to explore the impact of blockchain technology on financial transactions. Future

research should, therefore, examine different theoretical frameworks and additional financial

transaction areas to shed more light on the phenomenon.

Although we have utilized transaction cost theory, we have focused on the impact on

searching, bargaining, and controlling costs. However, we have left out a central transaction cost

theory goal concerning organizational boundaries around the decision of ‘make, buy, or ally’

(Coase, 1937; Ouchi, 1980; Williamson, 1979). As such, future research should consider

extending this dissertation to examine the governance aspect.

Compared to our theoretical analysis where we solely focused on ‘transaction theory’

costs, while collecting and synthesizing the literature and the empirical data, we broadly

examined various aspects of blockchain technology impact on financial transactions. Moreover,

in this case, the term ‘transaction cost’ took a broader meaning to engulf ‘transaction theory’

costs and production costs (Dyer, 1997; Zajac & Olsen, 1993), in addition to transition costs—

blockchain technology enablement costs. As such, future research should look deeper into these

broader areas of costs related to transitioning to and operating blockchain-enabled financial

transactions.

APPENDICES

Appendix A: Pluralist Methodology

Mingers and Brocklesby (1997) define a methodology as a structured set of guidelines or

activities to undertake a study. They further posit that a methodology will develop implicitly or

explicitly within a particular paradigm embodying its philosophical assumptions in terms of

ontology—the types and nature of entities—epistemology—the possibilities of, and limitations

on, our knowledge—and praxeology—the nature of our actions. For further details about the

characteristics of the main paradigm families the reader may refer to Appendix F.

This dissertation employs a pluralist approach, where all situations are viewed as

inherently complex and multidimensional, therefore, would benefit from multimethodology

(Mingers, 2001). The real-world is ontologically stratified and differentiated (Bhaskar, 1994),

and therefore, pluralism is essential to portray the richness and multidimensionality of the real

world. Mingers (2001) avers that research methods are instruments for provoking a response

from a complex multidimensional world, and in this respect, different methods may produce

useful information about various aspects of the world. Hence, to construct a rich view of a

phenomenon, it is both desirable and feasible to use pluralist methodology to gain richer and

more reliable representation of reality. From an engaged scholarship standpoint, pluralist

methodology is sensible because practitioners are already ahead of academia in combining

methodologies in practice (Mingers & Brocklesby, 1997).

Furthermore, Mingers and Brocklesby (1997) advocate that a study comprises several

phases where each phase has different tasks and requirements, and therefore, could be embarked

upon more effectively with a different methodology or a diversity of methodologies.

Additionally, Mingers and Brocklesby (1997) align with the view of postmodernists where

methods or parts of methods may be removed from their theoretical and philosophical base and

pressed into the service of different, even competing, logics.

To the common argument that research methods are bound to particular paradigms that

are incommensurable, Mingers (2001) reiterates that the world is almost certainly more complex

than we could ever know, therefore, this argument is an epistemic fallacy—limiting what may

exist to our current knowledge—and an anthropic fallacy—defining existence as centered around

human being (Bhaskar, 1978). Hence, it is both ontologically desirable and possible to approach

a phenomenon pluralistically. Mingers (2001) goes further to affirm the feasibility of detaching

research methods from a paradigm and using them within a context that proposes different

assumptions.

Tashakkori and Teddlie (1998) list additional benefits of pluralist methodology. First,

triangulation allows the researcher to validate data and results by blending a range of data

sources, methods, or observers. Second, pluralist methodology aids creativity through the

discovery of fresh or paradoxical factors that stimulate further research. Finally, pluralist

methodology permits the expansion of the scope of the research to draw broader conclusions

from situations (Mingers, 2001).

Triangulating multiple perspectives or methods on a complex business problem or

challenge attenuates the likelihood of unintended bias in interpretations (Van de Ven, 2007).

Furthermore, a pluralist methodology that compares and contrasts multiple plausible models of

reality is crucial to the emergence of rigorous scientific knowledge (Azevedo, 1997; Van de Ven,

2007). Most importantly, a pluralist methodology can help to study a business phenomenon that

is emerging and not well researched, by providing complementary types of insights. The essence

of pluralist methodology is to combine perspectives and parts of methodologies (Mingers &

Brocklesby, 1997).

Against this backdrop, this dissertation iteratively traverses multiple perspectives by

drawing on three methods. First, is exploring the literature on blockchain technology as it relates

to the financial industry. The second method of this research is a number of interviews on

blockchain technology with financial sector executives, subject matter experts, and academics to

enhance the understanding of a complex phenomenon by engaging the perspectives of diverse

scholars and stakeholders (Bechara & Van de Ven, 2007). Third, transaction cost theory (Coase,

1937; Ouchi, 1980; Williamson, 1975) as a particularly stimulating theoretical framework that

promises insights into the potentially disruptive effects of the blockchain technology. This

dissertation will employ an iterative juxtaposing and analysis of these three perspectives and

methods While collecting and synthesizing the literature and the empirical data, we broadly

examined various aspects of blockchain technology impacts on financial transactions. Moreover,

in this case, the term ‘transaction cost’ took a broader meaning to engulf ‘transaction theory’

costs and production costs (Dyer, 1997; Zajac & Olsen, 1993), in addition to transition costs—

blockchain technology enablement costs. However, during the theoretical analysis, we zoomed in

to solely focus on ‘transaction theory’ costs.

Underlying this qualitative dissertation, the researcher espouses, at the paradigm level, a

critical realist stance that adopts a combination of an objective ontology and a subjective

epistemology (Bechara & Van de Ven, 2007). This paradigm sits well with the context of the

inquiry at hand as well as with the pluralist methodology because of five major assumptions

made by Bechara and Van de Ven (2007). First there is a real world; however, we are limited in

our ability to understand it. Second, all facts and data are theory-laden. Third, even though some

methods are better than others in a given context, no form of inquiry can be value-free and

unbiased. Fourth, triangulation produces more rigorous knowledge. Finally, the fit of a

methodology is context specific.

Appendix A.1: The Literature Review Method

The first side of the triangular pluralistic methodology is the literature review. The

literature review situates the research contextually and builds on prior research (Myers, 2013).

The literature review is the foundation (Webster & Watson, 2002) that forms the empirical basis

for conducting the research (Trochim, Donnelly, & Arora, 2015). A major purpose of the

literature review is to recognize what is covered by the extant literature and to validate the

originality of the intended contribution as inspired by the research question.

According to Webster and Watson (2002), two forms of literature reviews exist. First,

when treating a mature subject matter that is well covered by the extant literature. Second, when

exploring an emerging topic that has a dearth of coverage by the extant research. Inasmuch as

blockchain technology is emerging, the approach of research adopted here aligns with the second

from where it is beneficial to augment with potential theoretical foundations (Webster & Watson,

2002) as explicated by the subsequent theoretical interpretation section. Moreover, the

triangulation with the perception analysis method helps in tightening the inherent looseness in

extant body of knowledge of such an emerging field as in the case of the topic of this

dissertation.

Based on the research question concerning the impact of blockchain technology on

financial transactions, the first step taken was to identify the intersection of the literature streams

comprising the overlap of blockchain technology with the financial industry. Although a few

technological articles were covered, the focus was on the business-related literature streams. To

fully comprehend the underlying business aspects and technological schemes of blockchain

technology, the researcher took notes from attending a virtual class offered by Princeton

University (Princeton University, 2014) as well as reading five books on the topic. The effort was

followed by a systematic literature review—a relatively broad survey of relevant literature that is

considered complete when no new concepts emerge in the article set (Trochim et al., 2015).

Accordingly, a systematic review of related literature began by searching for articles covering the

intersection of literature on blockchain technology and the intersection with the financial

industry. The search of the extant literature yielded four hundred and twenty related articles.

The next step was to examine the summaries of the articles mentioned above with two

goals in mind. The first goal was to identify which articles are strongly related to this dissertation

subject matter. The second goal was to group the concepts into subcategories. Following this

winnowing effort, the articles were read, and related passages were identified. Furthermore,

additional related articles—referenced in the set—were discovered. Next, the supplementary

articles were read, and related passages were identified. The overall effort resulted in a)

fiftyseven articles of general nature detailing blockchain-related business and technological

aspects;

b) forty-three articles concerning the intersection of blockchain technology with the financial

industry—inclusive of current and potential future blockchain-based financial applications; c)

thirty articles covering various non-financial applications of blockchain technology; and d) seven

articles related to legal and legislative areas of blockchain technology. In addition to the five

books mentioned earlier, the literature set comprised academic papers, white papers, industry

blogs, and videos. The deviation from the reliance on only academic articles is due to the

newness and emergence of the blockchain technology phenomenon.

Next, a systematic data analysis of the passages was conducted to identify and categorize

text passages in relation to the corresponding ‘literature review’ sections in the manuscript. Open

coding was employed to identify passages in the texts that describe relevant phenomena (Myers,

2013). Later, axial coding was utilized to conceptualize and group the passages into categories in

order to triangulate with the perception analysis data. Axial coding specifies each category’s

properties and dimensions (Charmaz, 2014). Finally, selective coding (Strauss & Corbin, 1990)

was employed to selects core categories and relate them to corresponding concepts from

transaction cost theory—the theoretical framework.

In addition, the literature review supports the systematic compilation and synthesis of all

of the extant literature related to a research subject matter (Trochim et al., 2015) and concisely

100

explicates what has been learned (Webster & Watson, 2002). Accordingly, to enable the synthesis

of uncovered concepts, the literature review was organized into three chapters: 1)

Introduction, 2) Technology: Blockchains, and 3) Application: Financial Transactions.

Appendix A.2: The Perception Analysis Method

The second pillar of the triangular pluralist mythology is the perception analysis.

Interviews are like night vision goggles that permit the researcher a vivid view of the scattered

objects in the field (Myers, 2013; Rubin & Rubin, 2011). The inclusion of the perception analysis

of blockchain technology practitioners, experts, and researchers increases the rigor of the

research because it fills the contextual gaps typically present in the extant literature concerning

emerging fields such as the one being examined by this dissertation. Furthermore, a significant

benefit for augmenting the literature review method with the perception data is to bridge the

temporal lag where there is two to three-year between conducting studies and their publication in

academic journals (Myers, 2013). Additionally, the perception analysis serves to validate insights

from the theoretical interpretation method. Finally, interviews are primary data—collected by the

researcher—that adds richness and credibility to qualitative research (Myers, 2013).

The first step was to decide on how many people to interview in order to gain their

perception. Inasmuch as this is a qualitative research, sample size has no significance. A more

critical concern than the number of interviews is to make sure that the pool of participants

embodies a variety of voices (Myers, 2013; Myers & Newman, 2007). As such, we believed that

sixteen participants provided enough variety of voices. Our confidence level in reaching rigorous

conclusions is further elevated by virtue of triangulating the data from the interviews with both

the literature review and the theoretical perspective. To further ensure diversity of views, target

participants were selected as follows: a) six financial industry blockchain technology executives,

101

b) five senior blockchain technology subject matter experts, and c) five blockchain researchers.

A semi-structured interview was devised with prepared questions; however, at times, we

deviated from the script and improvised new questions depending on the conversation (Myers,

2013). The reader may refer to Appendix I for details regarding structure of the interviews.

According to Myers (2013), semi-structured interviews enable the interviewees to provide more

rich insights and to offer valuable information. Contrasted with structured interviews where the

researcher sticks to prepared questions, and unstructured interviews where no prepared questions

are preformulated, semi-structured interviews allow flexibility while sustaining a reasonable

level of focus. As such, each participant was separately interviewed once for a duration of sixty

minutes by telephone. The researcher took notes during each interview. Additionally, each

interview was recorded digitally and transcribed later.

Next, we engaged in systematic data analysis of the interview transcripts. First, open

coding was applied to uncover relevant concepts (Myers, 2013). 286 passages were captured.

The second step was to use axial coding to conceptualize and group the passages into higherlevel

concepts (Charmaz, 2014) resulting into 9 distinct codes. Third and finally, selective coding was

employed to select core categories and relate them to other categories (Strauss & Corbin, 1990)

being our four arear areas of financial transaction in the case: asset verification, record keeping,

data privacy, and transaction costs. The perception analysis was iteratively juxtaposed to the data

generated with the literature review method. Moreover, data from both the interviews and the

literature review was iteratively related to the insights from the theoretical interpretation method

as will be explicated in the next section.

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During all phases of the interview process precautionary measures were taken to protect

the privacy of the participants’ personal information and their organizational data. The tools used

for conducting the interviews are listed in Appendices F, G, and H.

On the one hand, the goal of practical knowledge is concerned with situations in a

particular case. On the other hand, the purpose of scientific knowledge is to seek a generalization

that can be used to explain and understand things (Van de Ven, 2007). As such, the perception

analysis method covers the former, while the next method covers the latter.

Appendix A.3: The Theoretical Interpretations Method

The third and final leg of the pluralistic methodology is the theoretical interpretation.

Theoretical frameworks provide abstract, conceptual understandings of the phenomenon under

investigation (Charmaz, 2014). The approach adopted by the pluralistic methodology of this

dissertation aligns with the way Yin (2013) advocates triangulating multiple sources of empirical

data with theoretical schemes (Myers, 2013). As such, this dissertation embarked upon

iteratively triangulating transaction cost theory concepts, as a theoretical framework, with the

literature review and the interviews data. The endeavor provided more profound insights

supported by: a) practical knowledge that aided the understanding of a particular practical

situation and b) theoretical knowledge that helped in describing the fundamental nature of things

(Van de Ven, 2007).

This dissertation started by applying the literature review method as detailed in the

‘Literature Review Method’ section. Next, the perception analysis method was applied as

explained in the ‘Perception Analysis Method’ section. Lastly, transaction cost theory was

invoked to understand and explain findings from the two preceding methods. This sequential

approach aligns with Lawrence (1992) who advocates problem-oriented approaches rather than

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theory-oriented approaches (Van de Ven, 2007). Lawrence suggests to start by surveying the field

to inspect the problem and make an initial assessment of significant parameters; and then explore

relevant theory for promising conceptualizations (Van de Ven, 2007). Furthermore, this

dissertation summoned transaction cost theory in a fashion aligned with the view of Locke and

Latham (2004) who aver that extant frameworks are likely inspirational resource for making

sense of data since theory can be used to open up new possibilities (Van de Ven, 2007). As such,

the intended approach of this dissertation of exposing the tension between data and concepts of

transaction cost theory led to an interaction of observations that refined research foci and

generated possibilities to uncover new interpretations that, at times, conflicted with prevailing

views or advanced different perspectives (Van de Ven, 2007).

Drawing on the literature review and the perception analysis, we obtained perspicacity to

identify transaction cost theory concepts with potential explanatory power of interpreting the

blockchain technology phenomenon in the financial industry. To achieve that, we thoroughly

studied research papers detailing the fundamentals of transaction cost theory as exemplified by

(Coase, 1937, 2013; Commons, 1931, 1932; Ouchi, 1980; Williamson, 1973, 1975, 1979, 1985,

1988, 1994, 2008, 2010a, 2010b, 2014). Next, to acquire expertise with the analytical utility of

transaction cost theory concepts, we read studies that engage transaction cost theory as a

framework for analyzing different phenomena as exemplified by (Anderson & Gatignon, 1986;

Cheung, 1969; Pollak, 1985).

Transaction cost theory is interdisciplinary as it joins economics with aspects of

organization theory and contract law (Williamson, 1979). The kernel question of transaction cost

theory is concerned with organizational boundaries around the decision of ‘make, buy, or ally;’ in

other words, whether a transaction is more efficiently performed within a firm—vertical

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integration—or outside the firm—market governance—(Coase, 1937; Geyskens et al., 2006). As

such, the goal of minimizing transaction costs determines the governance mechanisms (Husted &

Folger, 2004). Transaction costs consist of searching, bargaining, monitoring, enforcement, and

other costs that are not directly related to the production of goods or services (Husted & Folger,

2004). Accordingly, the industry perception data and the literature review data were analyzed to

examine impact of blockchain technology on transaction costs. The transaction costs approach

allows identifying the circumstances—comprising goal incongruence and performance ambiguity

in Ouchi’s view—which produce the costs of mediating exchanges between participants (Ouchi,

1980). In Williamson’s views, transaction costs are determined by: a) frequency, meaning how

often a contract is invoked (Milgrom & Roberts, 1992; Williamson,

1979), b) asset specificity, referring to whether the asset could be deployed to a different purpose

(Husted & Folger, 2004; Klein et al., 1978; Williamson, 1979), and therefore, raising the concern

of goal incongruence (Ouchi, 1980) which is defined as the degree to which parties to an

exchange have incompatible objectives (Husted & Folger, 2004), c) uncertainty, comprising ex

ante difficulties of anticipating all future scenarios, language equivocality (Milgrom & Roberts,

1992; Williamson, 1975), and ex post performance ambiguity concerning the difficulty of

measuring performance, (Ouchi, 1980) or in other words, the metering problem related to the

intricacy of assessing the level of contribution of each individual or entity to a joint effort

(Alchian & Demsetz, 1972; Husted & Folger, 2004; Milgrom & Roberts, 1992), d) bounded

rationality, positing that people have limited ability to store, process, and retrieve information

(Simon, 1955; Williamson, 1973), and e) opportunism, exemplified by dodging duties, breaching

agreements, and stealing (Alchian & Demsetz, 1972; Husted & Folger, 2004; Williamson, 1979).

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Accordingly, we examine the aforementioned transaction costs determinants to contrast

traditional technologies with blockchain technology. Therefore, we stress the differentiating

characteristics of blockchain technology. First, blockchain timestamps events and records

(Crosby et al., 2016). Second, by design, blockchain transactions are immutable and tamperproof

(Mougayar, 2016; Wang et al., 2016). Third, blockchain ledger is “centralized and fully

decentralized at the same time.” Fourth, blockchain employs code-based consensus mechanisms

(DuPont & Maurer, 2015; Mori, 2016). Fifth and finally, blockchain has smart contracts as a

native feature (Auctus_Team, 2017; Mougayar, 2016)—digitally drafting and automatically

enforcing transactions instead of burdensome human interventions (de Meijer, 2015; Yli-Huumo

et al., 2016; Zhao et al., 2016).

Tapscott and Tapscott (2016) provided a general transaction cost analysis of blockchain

technology independent of industry. We build on and extend their work by presenting a

transaction cost analysis specific to financial transactions. Specifically, we explore the

transaction cost theory activities comprising searching, bargaining, and controlling (monitoring

and enforcement) (Hennart, 1993; Husted & Folger, 2004; Williamson, 1985) to shed light on

how the adoption of blockchain technology will affect the transaction costs related to asset

verification, record keeping and data privacy. We also go beyond the analysis of Tapscott and

Tapscott (2016) by examining not only where blockchain technology attenuates transaction cost

but also where it increases transaction cost. Finally, to objectively compare transaction costs

between traditional technologies and blockchain technology, we assume that the blockchain

network is already up and running. The assumption allows us to avoid the complications in

comparing sunk costs that are related to established technologies with enablement costs that are

related to deploying blockchain technology.

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In this way, this dissertation sought to employ transaction cost theory to make sense of

blockchain technology phenomenon in the financial industry. The approach is analogous to past

analysis conducted by researchers such as the study by Cheung (1969) that utilizes the

transaction cost theory concepts of uncertainty and contracts to examine contractual records in

Chinese agricultural communities. Another example is the analysis of entry mode decision into

international markets through the lens of transaction cost theory by Anderson and Gatignon

(1986). A final and third example is the work of Pollak (1985) who examines the economic

activity and behavior of the family through the lens of transaction cost theory.

In summary, the employment of transaction cost theory enriched the insights of the

findings because according to Van de Ven (2007) scientific inquiry involves a repetitive contrast

between theoretical ideas and empirical data that aids in making sense of the observations.

Appendix B: General Blockchain Applications

Blockchain technology use beyond cryptocurrency is being tried in many industries

where some forms of exchange is conducted (Yli-Huumo et al., 2016). Zhao et al. (2016) posit

that the evolution of blockchain technology runs through blockchain 1.0 with a focus on digital

currency, then blockchain 2.0 concerning digital finance, to blockchain 3.0 encompassing a

digital society. Zhao et al. discern that despite the burgeoning of many experimental projects,

blockchain 2.0 and 3.0 will need many years to flourish and bring about significant economic

impacts. Mougayar (2016) concurs and anticipates blockchain technology adoption and evolution

to parallel the Web’s, which formed initially over seven years after the launch of the Internet in

1983, but then required additional efforts over three years (1994-1997) for most business to

understand its potential. Therefore, Mougayar expects that blockchain technology will persist as

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a semi-complex phenomenon for the period 2015–2018, analogous to how it took Bitcoin three

years (2009–2012) before it started to permeate into the main fabric of the economy.

To establish a reference for understanding current and potential blockchain-based

offerings, this dissertation will invoke the utilitarian framework of Mougayar (2016) which lists

blockchain technology touch-points as programmable assets, programmable trust, programmable

ownership, programmable money, programmable identity, and programmable contracts. Swan

(2015) provides other classifications for applications —see Appendix D. The details of each of

Mougayar’s six concepts will follow. Because blockchain technology applications may overlap

with more than one touch-point, the examples offered under each are not necessarily mutually

exclusive. Furthermore, because the concepts of programable assets and programable ownership

are intricately conjoined, they will be combined in a single section.

Appendix B.1: Programmable Assets and Programmable Ownership

According to Swan (2015), blockchain technology allows registry, inventory, and

exchange of hard assets such as houses and computers; intangible assets such as shares,

reservations, and health data; and copyrights such as music albums, audible books, and digitized

fine art. The exchange of assets is possible because blockchain immutably stores information

about every transaction and ensures its legitimacy (Pilkington, 2015). In other words, the

blockchain time-stamps documents signifying rights or ownership, therefore providing

indisputable certifications that are cryptographically secure and enabling seamless verification

capabilities (Mougayar, 2016) (Swan, 2015). As such, in a blockchain database, anything can be

treated as a ‘smart property’ (Swan, 2015). Smart property is the notion of assigning a unique

identifier such that an asset can be traced, administered, and exchanged (Swan, 2015). Mougayar

(2016) considers smart property a native unit requirement for blockchain operations defined as a

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digitized version of an item that includes specific rights to use and typically has a value

associated with it. Elaborating further, Mougayar states that smart property extends the concept

of a digital asset by associating it to a blockchain such that it can never be double-spent,

doubleowned, or double-sent. As such, a smart property is "an asset or thing that knows who

owns it" and, as such, it enables more possibilities, flexibility, and discoverability to facilitate

frictionless decentralized peer-to-peer exchanges (Mougayar, 2016). However, that does not

imply that related contracts concerning the exchanges are not subject to existing laws (Swan,

2015).

In this way, smart property enables things like domain name systems (DNS) as embodied

by Namecoin—an open-source organization that seeks to heighten decentralization, security,

censorship resistance, privacy, and speed of certain apparatuses of the Internet exemplified by

DNS (Namecoin, n.d.)—and digital content distribution and anti-counterfeit—enabled by the

immutability attribute which prevents double-spending, double-owning, or double-sending

(Mougayar, 2016; Wang et al., 2016). Another example listed by Swan (2015) is a preestablished

smart contract that would automatically transfer a title deed of an automobile from the financing

firm to the individual owner upon receiving the final payment. In this sense, blockchain becomes

a single source of truth (Pilkington, 2015) for the latest status of ownership of assets. The

absence of central human intervention to enforce verifiability is a fundamental blockchain

technology novelty (Swan, 2015).

Blockchain technology enables irrefutable proofs that are cryptographically secure

through the time-stamping of documents representing rights or ownership (Mougayar, 2016). As

such, blockchain technology allows exact ownership and chain of custody to be ascertained (de

Meijer, 2015). Consequently, for the legal sector, this facilitates efficient digital asset exchange

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concerning document and authorship verification, title transfers, and contract enforcement

(Kiviat, 2015). Two of the established blockchain-based enterprises are Viacoin (VIAcoin, n.d.)

which offers notarizing services through the timestamping, transfer, and verification of

ownership of documents (Kiviat, 2015); and Libra (Libra, n.d.) which supplies business

customers with reports, audits, and digital asset transactions analysis in any blockchain database

(Pilkington, 2015).

Blockchain technology could furnish a transactional platform for sharing economy

services (Mainelli & Smith, 2015), as it naturally allows trusted documentation of large-scale

peer-to-peer activities (Lindman et al., 2017). Contrary to the misconception of considering

Airbnb, Uber, and the like as sharing economy, these businesses do not share but rather

aggregate, and in the process, they collect data for commercial exploitation (Tapscott &

Tapscott, 2016). Moreover, Uber and Airbnb exemplify oligopolistic intermediaries according to

Mougayar (2016). Swan (2015) expects the emergence of decentralized models of Airbnb—for

lodging, Getaround—for vehicles rentals, and LaZooz—for peer-based ride sharing. Backfeed is

a leader in the sharing economy space. On its homepage, Backfeed mission statement is to

develop a distributed governance system for blockchain-based applications that allows

collaborative creation and distribution of value in spontaneously emerging networks of peers

(Backfeed, n.d.). Toyota Research Institute has a vision to use blockchain technology to allow car

owners to monetize seats, trunk space and other unused resources (Coindesk, 2017g). Vitalik

Buterin, founder of the Ethereum blockchain said: “Whereas most technologies tend to automate

workers on the periphery doing menial tasks, blockchains automate away the center. Instead of

putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers

work with the customer directly” (Tapscott & Tapscott, 2016).

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Appendix B.2: Programmable Trust

Joichi Ito, Director, MIT Media Lab said: “Blockchain is to trust as the Internet is to

information" (Tapscott & Tapscott, 2016). Blockchain technology embeds trust as an intrinsic

attribute of transactions by implanting rules that represent trust, making blockchain a platform

for validating transactions via logic in the network, not via a protected database entry or central

authority (Mougayar, 2016). Swan (2015) describes blockchain as trustless in the sense that users

do not need to trust each other or a central intermediary, but only need to trust the system. She

further explicates that the blockchains immutability, transparency, access, and reach enable

global trust.

From executive stock exercises to online lottery to patenting—through time binding

commitments with proof of knowledge—the blockchain trust fabric can transform any form of

transaction. Democratic system could be strengthened by blockchain because the technology can

elevate the level of trust in voting (de Meijer, 2015; Lindman et al., 2017) where transparency

(Zhao et al., 2016) and immutability attributes are the primary blockchain technology enablers.

The technology could also be used for the creation of smart property where blockchain becomes

an inventory, tracking, and an exchange mechanism for hard assets like diamonds, and for tracing

the authenticity and origin of goods for socially responsible consumers and businesses (Lindman

et al., 2017).

Blockchain technology can transform trust in supply chain management by exacting

provenance (Kim & Laskowski, 2016; Zhao et al., 2016) because it furnishes a shared,

consensus-based public ledger that can track the process from source to destination (Crosby et

al., 2016; Zhao et al., 2016). According to Arvind Krishna, the director of research at IBM

(Coindesk, 2017b), the technology could save billions of dollars spent in coordination costs in

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both capital markets and the shipping industry; a typical shipment gets scrutinized by about thirty

administrations before reaching its final destination; blockchain technology is ideal to aggregate

and transmit the certifications required during the process, and therefore could save 20 percent of

the cost.

There has always been tension between transparency and privacy. Transparency enhances

the collective trust—increased transparency provides increased levels of trust (Mougayar, 2016).

Nevertheless, at users’ level, trust is also concerned with privacy. In a public blockchain network,

selective transparency and privacy are achieved via cryptographic technologies, where

transactions can be verified without revealing all aspects of the identity of their user (Mougayar,

2016).

Another application of the trust feature in blockchain technology is prediction markets,

where the platform could furnish a system for increased trust and confidence in the outcome of

the process. For example, Predictious—enabling crowd predictions from the presidential

elections to the Oscars (Predictious, n.d.)—and Fairlay—enables users to bet on sport events like

horse races and popular events like elections (Fairlay, n.d.)—offer betting venues for the typical

real-world outcomes (Swan, 2015). A distinct flavor of trust-based blockchain technology

applications is distributed cloud storage—exemplified by Storj (Storj, n.d.) which allows users to

store data securely, economically, and privately without a centralized authority (Kiviat, 2015;

Tapscott & Tapscott, 2016). Storj uses peer-to-peer protocols to provide secure, and private cloud

storage (Swan, 2015) that enables users to monetize their extra space in a manner that provides

more trust and privacy, compared to regular clouds, because the data is encrypted and

fragmented. Mougayar (2016) affirms that blockchain networks do not replace cloud computing,

but rather unbundle and democratize parts of it.

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Blockchain technology enables new business models and resolves the trust issue more

efficiently via code-based networks (Zhao et al., 2016). A distinct and foundational blockchain

technology application is an emerging business model called distributed autonomous

organization—organizations with self-governed operations and user-produced value creation and

rewards (Mougayar, 2016). The distributed autonomous organization is a transformational

concept that could radically alter the architecture of trust, and subsequently, the structure of

businesses.

Appendix B.3: Programable Identity

Tapscott and Tapscott (2016) posit that blockchain technology will allow ‘the virtual

you—your avatar’ be owned by you, hence, empowering you to reveal only what you needed to,

depending on the situation, while whisking up your data crumbs when navigating the digital

sphere. Moreover, the blockchain technology concept of zero-knowledge—ability to proof

something without revealing information—protects the confidentiality of transactions and the

privacy of individuals where one can prove something without revealing any information about

one’s identity or the content of the transaction (Narayanan et al., 2016).

According to a Coindesk (2017c) article, about 2.4 billion individuals do not have a

government-issued identity?, and for those who do, the current centralized systems that manage

those identities are cumbersome at best. The article goes on to suggest that blockchain

technology could aggregate fragmented identities and reputation systems that are spread out

across numerous forms such as passports and birth certificates; and platforms like LinkedIn and

Uber. Drummond Reed, chief trust officer of Evernym—a company building an identity network

on a permissioned blockchain—argued that fear about privacy is unjustified, stating: "You do not

put private data on the chain. You put public data on the chain" (Coindesk, 2017c). Put in a

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slightly different way, in a blockchain database, one can reveal their public elements of identity,

while securely encrypt their private elements. Identity and reputation go together hand in hand.

Identify reputation in the physical world is local according to Tapscott and Tapscott (2016)—

shopkeepers, employers, friends—however, in the blockchain digital economy, reputations is

globally portable, allowing a resident of Africa to establish the reputation required to borrow

money from America. Ultimately, the technology enables an open, democratic, and scalable

digital economy (Wang et al., 2016).

Appendix B.4: Programable Contracts

Smart contracts are contracts that are digitally drafted and automatically enforced with the

goal of attenuating human interventions (de Meijer, 2015; Yli-Huumo et al., 2016; Zhao et al.,

2016), and hence, reduce transaction costs. Smart contracts are potentially a groundbreaking

application of blockchain technology. Mougayar (2016) argues that smart contracts are a vital

underpinning of blockchain technology and their role in blockchain technology is analogous to

how HTML allowed information to be openly publishable and linkable on the Web. The

possibilities for programmable contracts were implanted into the blockchain protocol at its

contrivance (Swan, 2015). Smart contracts potentially could substitute some of the functions

currently executed by expensive and slow legacy intermediaries (Mougayar, 2016).

There are three elements of smart contracts that make them distinct: 1) autonomy—

ensuing its launch the code acts on its own, 2) self-sufficiency—ability to direct resources on its

own, and 3) decentralization—distributed over multiple servers where a smart contract is

selfexecuting across the network (De Filippi, 2014; Swan, 2015). Therefore, a smart contract

embodies ‘code is law’ because it will execute ‘no matter what’ in a fashion that could introduce

a new paradigm that requires hefty absorption by the society for smart contracts to become

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common (Swan, 2015). However, Lindman et al. (2017) contend that the standing of smart

contracts will upsurge by virtue of the broader adoption of the Internet of things.

A traditional contract is a promise between two or more parties to exchange commitments

(Swan, 2015). She further posits that while trust plays a central role in traditional contracts, smart

contracts minimize trust requirements because they are defined and executed by the code (Swan,

2015). Smart contracts do not change the expected outcome, they only lessen the role of human

judgment (Swan, 2015). Steve Omohundro, president of think tank Self-Aware Systems, said:

"That intersection of legal descriptions and software is fundamental, and the smart contracts are

the first step in that direction" (Tapscott & Tapscott, 2016). Smart contracts will potentially

attenuate court litigations (de Meijer, 2015) and enable frictionless transactions.

Since the launch of Ethereum in 2015, smart contracts enjoyed increased cognizance.

Ethereum actualizes the possibilities of smart contracts by furnishing an open source platform

(Ethereum, n.d.) that is foundational to its mission (Mougayar, 2016). Smart contracts stimulate

autonomous economic agents and decentralized autonomous organizations where code displaces

human management and traditional corporations (Tapscott & Tapscott, 2016) because coupled

with the underlying blockchain platform, smart contracts enable innovative business models and

settle the trust conundrum more profoundly (Zhao et al., 2016). As such, “smart contract also

provides a means for owners of assets to pool their resources and create a corporation on the

blockchain, where the articles of incorporation are coded into the contract, clearly spelling out

and enforcing the rights of those owners” owners” (Tapscott & Tapscott, 2016).

For example, a smart contract-based mortgage could reset automatically upon checking a

prespecified agreement-encoded website (Swan, 2015) or could enable renting hotel rooms

without human intervention (Zhao et al., 2016). Other simple examples listed by (Swan, 2015)

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are a smart contract that enacts a gift upon a grandchild’s eighteenth birthday, or a preestablished

smart contract that automatically transfers the ownership of a car title to individual owner upon

completion of payments. A final smart contract example is envisioned by Toyota Research

Institute where vehicle's sensors could store driving data on a blockchain, hence, allowing

owners to be eligible for lower insurance rates by virtue of increased transparency, reduce fraud,

and access to driving data that measures safety habits (Coindesk, 2017d).

To interconnect smart contracts on the blockchain to off-chain databases, smart oracles

are required. Smart oracles hold real-world information, such as an identity, a certificate, or any

data element and could behave in an agent-like fashion to direct the smart contracts (Mougayar,

2016). Therefore, one could envisage a world of interconnections and interactions between smart

contracts, smart oracles, Internet of Things, and artificial intelligence that would open a wide

range of possibilities.

Appendix B.5: Programable Money

As a continuation of the earlier chapter ‘General applications’, this section will discuss

programable money as the sixth and final chapter touch-point of blockchain technology

according to the framework of Mougayar (2016). Although Bitcoin will be the focus of the

discussion, the argument applies to any brand of cryptocurrency. Bitcoin is chosen because it is

the first and the one with largest share in the cryptocurrency market, where numerous brands of

cryptocurrency have emerged. One example is Litecoin—a platform similar to Bitcoin but faster

(Kiviat, 2015).

Money is defined as a medium of exchange, a store of value, and a unit of account

(Greeley, 2013; Van Alstyne, 2014). Although Bitcoins have no physical existence, no

government sponsorship, and operate with mostly technical regulation, Bitcoin has all the of the

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three above mentioned attributes of money (Van Alstyne, 2014). Alternatively, according to Bjerg

(2016) money could be conceptualized through any of three major theories: commodity theory,

fiat theory, and credit theory; and “it is arguable that Bitcoin is commodity money without gold,

fiat money without a state, and credit money without debt.” To the question of whether Bitcoin

has value, Van Alstyne (2014) answers affirmatively that it already has. He further posits that, in

the future, countries will establish their own cryptocurrency. Bitcoin adoption has increased

rapidly, and today Bitcoin is honored as a unit of payment for various goods and services (Bjerg,

2016).

As explained earlier, new Bitcoins are produced by ‘miners’ as a reward for their

computational participation in the bitcoin network. The cryptocurrency is then circulated in the

blockchain user’s network and is thereafter exchanged with goods, services or traditional fiat

currencies. Van Alstyne (2014) argues for Bitcoin over conventional exchange methods stating

that a) the Bitcoin network furnishes a near frictionless commerce platform that enables less

expensive transactions (Andreessen, 2014), b) transcends credit cards at detecting fraud since

Bitcoin transactions require public authentication, and c) the Bitcoin protocol guarantees that

only authorized parties can spend from a specific account with a guaranteed desired level of

privacy and pseudonymity. Nonetheless, the pseudonymity feature led some critics to raise

concerns related to the misuse of cryptocurrency for unlawful activities (de Meijer, 2015; Van

Alstyne, 2014). However, conventional payment methods are hardly any different in that respect.

To the contrary, Van Alstyne (2014) argues that the preferred method of exchange for criminals is

cash. Moreover, he avers that the immutability and traceability of the blockchain ledger make it

possible for legal authorities to identify and track lawless activities.

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Bitcoin presents a conceptual departure from conventional forms of money (Bjerg, 2016)

and, therefore, is a fundamental change to some foundational basics in the financial industry.

Consequently, it could existentially threaten traditional financial institutions because it radically

alters the way transactions are conducted. Subsequently, the financial industry must explore how

to benefit from cryptocurrency while adjusting for consequences that may not be advantageous.

Consequently, de Meijer (2015) avers that financial institutions may benefit from collaborating

with the ecosystem around crypto technology. Furthermore, a) cryptocurrencies are increasingly

adopted by users, b) more salespoints are accepting cryptocurrency as a method for exchange,

and c) the market cap of cryptocurrencies continues to increase—The reader may refer to

Appendix E to appreciate the growth of market cap of cryptocurrency. Therefore, the financial

industry cannot ignore the cryptocurrency growing phenomenon.

Appendix C: Actual blockchain structure

Actual blockchain structure (Narayanan et al., 2016)

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Appendix D: Classes of Blockchain technology Non-Cryptocurrency Applications

Blockchain Technology Applications Beyond Cryptocurrency (Swan, 2015)

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Appendix E: Market Cap of Top 10 Cryptocurrencies

Market Cap of Top 10 Cryptocurrencies (cryptocurrencychart, n.d.).

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Appendix F: Major Research Paradigms

Positivist, Interpretive, & Critical Paradigms (Myers, 2013)

C Systems

The dominant form of

research in most business

and management disciplines

Not as common but has

gained ground over the past

two decades

Much less common.

However, there are signs of

growth

Reality is objectively given

and can be described by

measurable properties, which

are independent of the

observer and their

instruments

Access to reality is only

through social constructions

such as language,

consciousness, shared

meanings, and instruments.

The observer is part of the

reality constructed

Social reality is historically

constituted and is produced

and reproduced by people.

Although people can

consciously act to change

their reality, they are

constrained by forms of

social, cultural, and political

domination.

Aligns with the tools of the

natural science.

The tools of the natural

sciences are inappropriate for

the study of social and

organizational phenomena

Similar to interpretive

The language of science can

be exact. Meanings are

separate from facts.

Human science Languages is

irreducibly equivocal and

evolving. Meanings are the

facts.

Similar to interpretive

Attempts to increase the

predictive understanding of

phenomena

Attempts to understand

phenomena through the

meanings that people assign

to them

Challenges prevailing

beliefs, values, and

assumptions that might be

taken for granted by the

subjects.

Empirical data are assumed

to be objective

The correct meaning of data

is determined by the context

Different interpretations are

given different weight or

preference—sometimes

imposed by some upon

others.

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Assumes value-free data and

facts

Tries to be value-free, though

acknowledging the

Explicit ethical basis that

motivates the researcher

difficulty

work

Propositions in terms of

independent, dependent

variables, and relationships

Focus instead on the

complexity of human sense

making as the situation

emerges

Similar to Interpretive

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Appendix G: Recruitment E-mail

The following email was sent to each prospective participant in the study:

Request to Participate in a Georgia State University Research Regarding the Impact of

Blockchain Subject: Technology on the Financial Industry

Email Text:

Dear <Name of candidate participant>,

As a subject matter expert on blockchain technology, you are cordially invited to

participate in a research study. The purpose of the study is to investigate the impact of blockchain

technology on the financial sector.

Please feel free to read exact details in the ‘informed consent form’ attached. If you agree

to participate, we will contact you to arrange for a time slot convenient to you.

Participation in the research is voluntary and consists of a single interview over the

phone, lasting no more than 1 hour. You may skip questions or stop participating at any time.

Your name and other facts that might point to you will not appear when the researchers

present this study or publish its results. The findings will be summarized and reported in a

synthesized form. You will not be identified personally. Nor will your organization be identified.

Summary:

Name and contact information of the interviewer: Al Tilooby at 510-770-4599 or

[email protected]

Where the research will be conducted: Over the phone from Georgia State University

Purpose of research: To investigate the impact of blockchain technology on the financial

sector

A summary of the criteria that will be used to determine eligibility: Financial industry

blockchain technology executives, senior blockchain technology subject matter experts, and

blockchain technology researchers.

A brief list of participation benefits: There are no direct benefits to you personally.

Overall, the research team hope to contribute the following to the existing body of knowledge:

• Contribution to practitioners: How financial institutions can prepare for blockchain

technology opportunities and threats.

• Contribution to the literature: A synthesis of the extant financial literature related to

blockchain technology, coupled with empirical accounts of industry perception of the

future impact of blockchain technology.

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• Contribution to the theory: A theoretical interpretation of blockchain technology as a

disruptive technology in terms of transaction cost theory.

The number of participants to be enrolled: 16 participants.

Time or other commitment required: 1-hour interview conducted in a single session.

Compensation, if any: You will not receive compensation for participating in this

research.

Thank you and Best Regards,

Name: Al Tilooby

Candidate – Doctorate in Business

J. Mack Robinson College of Business

Georgia State University

35 Broad Street, NW, Suite 427

Atlanta GA 30303 e-mail:

[email protected] phone:

+1-510-770-4599 Appendix

H: Informed Consent From

The following form was sent to and discussed with and accepted by all participants before the

interviews.

Georgia State University Department of Computer Information Systems

Informed Consent

Title: The impact of blockchain technology on financial transactions

Investigators: Lars Mathiassen and Al Tilooby

I.Purpose:

You are invited to participate in a research study. The purpose of the study is to investigate the

impact of blockchain technology on financial transactions with focus on asset verification,

record keeping, data privacy, and transaction costs. You are invited to participate because you

are a subject matter expert. Sixteen participants will participate in this study. Each participant

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will individually be interviewed over the phone for a maximum of one hour at a time slot of their

convenience.

II.Procedures:

If you decide to participate, one of the investigators will contact you to arrange for a time slot

convenient to you, then call you at the time to conduct and record the interview. The audio

recordings will be captured on the investigator’s smart phone that is password-protected. The

recording will be destroyed after the completion of the transcriptions to protect the

confidentiality of the data. Only one investigator will conduct your interview.

III.Risks:

In this study, you will not have any more risks than you would in a normal day of life.

IV.Benefits:

Participation in this study may not benefit you personally. Overall, we hope that the society will

benefit from the contributions of this study to the existing body of knowledge as follows:

a) Contribution to practitioners: How the financial organizations can prepare for

blockchain technology opportunities and threats.

b) Contribution to the literature: A synthesis of the extant financial literature related to

blockchain technology, coupled with empirical accounts of industry perception of the

future impact of blockchain.

c) Contribution to the theory: A theoretical interpretation of blockchain as a disruptive

technology in terms of transaction cost theory.

V. Voluntary Participation and Withdrawal:

Participation in research is voluntary. You do not have to be in this study. If you decide to be in

the study and change your mind, you have the right to drop out at any time. You may skip

questions or stop participating at any time. Whatever you decide, you will not lose any benefits

to which you are otherwise entitled to.

VI.Confidentiality:

The investigators will keep your records private to the extent allowed by law. Dr. Lars

Mathiassen, and Al Tilooby will have access to the information you provide. Information may

also be shared with those who make sure the study is done correctly—GSU Institutional Review

Board, the Office for Human Research Protection (OHRP). The investigators will use your

initials instead of your name on the study records. The information you provide will be stored on

a password-protected smartphone for audio, and password-protected computer for taking notes

and transcribing. The audio recording will be stored for no more than two weeks and then

destroyed after the completion of the transcriptions to protect the confidentiality of the data. Your

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name and other facts that might point to you or the institution you work for will not appear when

the researchers present this study or publish its results. The findings will be summarized and

reported in a synthesized form. You will not be identified personally. Nor will your organization

be identified.

VII.Contact Persons:

Contact Lars Mathiassen at 404-413-7855 or lars.mathiassen@ceprin.org; or Al Tilooby at

510770-4599 or [email protected] if you have questions, concerns, or complaints about

this study. You can also call if you think you have been harmed by the study. Call Susan Vogtner

in the Georgia State University Office of Research Integrity at 404-413-3513 or

[email protected] if you want to talk to someone who is not part of the study team. You can

talk about questions, concerns, offer input, obtain information, or suggestions about the study.

You can also call Susan Vogtner if you have questions or concerns about your rights in this study.

VIII.Copy of Consent Form to Participant:

Please save a copy of this consent form for your records.

If you are willing to volunteer for this research and be audio recorded, please continue with the

interview.

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Appendix I: Interview Protocol

The following semi-structured interview protocol was conducted with each of the study

participants:

Interview Metadata

Date

Initials of the interviewee

Category of the interviewee:

1. Financial industry executive

2. Senior blockchain technology subject matter

experts

3. Blockchain technology researcher

Length of Interview

Introductory script:

Hi <participant’s name>. Thanks for accepting to participate in this study. My name is Al

Tilooby. I am a candidate for a doctoral degree in business at Georgia State University. Please

let me know if you have questions about the informed consent form, or other general questions.

Thank you <participant’s name>. If you are willing to volunteer for this research and be

audio recorded, please continue with the interview. And With your permission, I am going to start

the recording and take notes as well.

Just to make sure I ask the right questions, please tell me a bit about you and your

background.

Thank you <participant’s name>. The purpose of our interview today is to gather your

perspective as input to our research study. The study is to understand the impact of blockchain

technology on financial transactions with emphasis on asset verification, record keeping, data

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privacy, and transaction costs. You have been selected to participate in this study because you

are a subject matter expert.

Semi-Structured Interview Questions

Opportunities

Challenges & Issues

Regulatory

How could blockchain

technology enhance asset

verification in financial

transactions?

What are some of the

challenges and issues the

financial industry could face

with blockchain technology

regarding asset verification

in financial transactions?

Any regulatory aspects to

watch out for in relation to

blockchain technology and

asset verification in

financial transactions?

How could blockchain

technology enhance record

keeping in financial

transactions?

What are some of the

challenges and issues the

financial industry could face

with blockchain technology

regarding record keeping in

financial transactions?

Any regulatory aspects to

watch out for in relation to

blockchain technology and

record keeping in financial

transactions?

How could blockchain

technology strengthen data

privacy in financial

transactions?

What are some of the

challenges and issues the

financial industry could face

with blockchain technology

related to data privacy

protection in financial

transactions?

Any regulatory aspects to

watch out for in relation to

blockchain technology and

data privacy in financial

transactions?

Could blockchain

technology decrease

financial transaction costs?

What are some of the

challenges and issues the

financial industry could face

with transaction costs in

relation to blockchain

technology?

Any regulatory aspects to

watch out for in relation to

blockchain technology and

transaction costs in financial

transactions?

Any use cases for

blockchain technology you

could think of in financial

transactions with regards to

Challenges and issues that

arise from these use cases?

Regulatory impacts due to

these use cases?

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INTRODUCTION Financial transactions are foundational

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