Blockchains ≠ Financial Market Infrastructure (FMI)

Crypto Law Review
Published in
10 min readNov 30, 2019


Below is a brief response to Angela Walch’s Open-Source Operational Risk: Should Public Blockchains Serve as Financial Market Infrastructures?, in Handbook of Blockchain, Digital Finance, and Inclusion, Vol. 2 (David Lee Kuo Chuen & Robert Deng, eds., Elsevier 2017).

  • FMI = Financial Market Infrastructure
  • AW = Angela Walch
  • CA = CleanApp

1. Intro/Summary

In her 2017 book chapter referenced above, Angela Walch analyzes blockchain governance by reference to standards set out in international Principles for Financial Market Infrastructures (FMI).

Here is one of Walch’s core conclusions:

Screenshot of Angela Walch’s ‘Open-Source Operational Risk … ‘ p. 12 (emphasis added)

In a nutshell: if blockchains are FMI, blockchain operators will be required to “support the stability of the broader financial system.” So whether blockchains are or are not FMI is a big question, with far-ranging implications.

tldr: (1) Despite some superficial parallels between blockchain forms, processes, and institutions and existing financial forms, processes, and institutions — blockchains are qualitatively distinguishable (and intentionally different) from non-blockchain financial networks; (2) Blockchains are not FMI; (3) ‘blockchains = FMI’ classifications severely curtail the economic potential of blockchain technology.

2. Are Blockchains FMI?

In order to apply global FMI ‘principles,’ ‘norms,’ and ‘standards’ to blockchains, we must analyze a threshold question: should we view blockchains as financial market infrastructure? What are the arguments for, and against, doing so?

In her chapter, Walch largely elides analysis of whether blockchains are viewed as FMI (and/or should be viewed as FMI).

  • In section II, Walch acknowledges that some industry actors think “blockchains will be used to transform the world of finance.”
  • In sections II & III, Walch notes that “public blockchains [c]ould expose any financial market infrastructures they undergird to new and potentially increased operational risks.”
  • In section III, Walch argues that existing governance frameworks are unsuitable for public blockchains, “at least if these blockchains undergird financial market infrastructures or other important societal systems,” suggesting that FMI-type standards should apply outside of financial settings.

But what if blockchain networks are not trying to “undergird” any type of “financial market infrastructure” — ?

Among so many diverse groups of blockchain stakeholders (including developers of financial and non-financial use cases), who should decide the predominant thrust — the object, purpose, and essence — of blockchain systems? How? Why?

For purposes of this conversation, the narrow question is: who should decide whether blockchains are (&/or should be) financial market infrastructure?

3. Blockchains ≠ Finance

A lot of people in the blockchain space think of blockchains as financial networks, or blockchains as primarily financial networks.

Proponents of blockchains = finance frameworks are quite vocal.

That’s because for blockchain finance folks, the core value proposition lies in letting everybody know about the transformative potential of blockchain-based finance as opposed to traditional finance. The more people that use blockchain financial instruments, the more valuable those instruments (and underlying networks).

But not everybody views blockchains this way.

The majority of people in the blockchain space understand blockchains for what they actually are (and should remain): blockchains are globally-distributed and decentralized databases for storing any type of data, not only data pertaining to ‘finance’ or ‘property’ or ‘money.’

Like Microsoft Excel, blockchains are general-purpose databases; blockchains are NOT exclusively or predominantly financial databases.

If you want to venture deeper that argument, please check out Crypto’s Finance Fetish:

Simplifying greatly, here’s the lay of the land today:

  1. some people want blockchains to be seen as financial networks;
  2. other folks want blockchains to be seen as purely monetary networks (the ‘money’ use case related to, but different from, the ‘financial’ use case);
  3. some people think blockchains are non-financial networks altogether;
  4. others think blockchains are general-purpose protocols and databases that can be used for any/all of the use cases above, among many untold others.

We know that blockchain classification is a matter of great importance for the entire blockchain space. So, who should decide?

The answer in a nutshell: (1) NOT lawyers; (2) YOU.

Here’s why:

4. Legal Views on Blockchains =/≠ FMI

Here are a few excerpts from Walch’s book chapter, and responses:

Angela Walch: The question becomes, then, whether the benefits of public blockchains serving as the underlying technology of FMIs (e.g., reduction of settlement risk) can justify the […] operational risk [of rough consensus].

CleanApp: Since inception, blockchains (including Bitcoin) were not “financial infrastructure.” ‘Finance’ & FMI is the problem that Bitcoin set out to solve. See Bitcoin WP, pg 1. So too with Ethereum, arguably. The original goal was arbitrarily complex blockchain relationships “for more than just money.” So the narrow question is: shouldn’t folks who choose to build their FMI stuff on top of Ethereum be responsible for risk of loss, not Ethereum developers or institutions like the Ethereum Foundation?

Angela Walch: This paper contributes to the public-versus-private blockchain debate, explicating how the use of traditional grassroots open source software practices in public blockchains would expose any financial market infrastructures they undergird to new and potentially increased operational risks in exchange for the benefits they seductively promise. There are tradeoffs to all improvements we make, and in this case, the new operational risks seem quite hefty.

CleanApp: But “public blockchains” aren’t choosing to “undergird” FMI. Some blockchain actors think of blockchains as FMI, but definitely not everyone. Some core developers want blockchains to be “finance” or FMI but not everyone. So why should developers of a project that has multiple yet-unknown financial and non-financial uses be held to a heightened FMI governance standard? If anything, shouldn’t those governance standards apply to, say, L2 DeFi developers who want Eth recognized as money & are actually building dFMI?

Angela Walch: As my analysis will reveal, a lack of defined or accountable control over these processes generates operational risks for public blockchains, impacting their suitability to serve as financial market infrastructure (or other critical societal systems).

CleanApp: By definition, public blockchains are premised on tolerance for (& mitigation of) the operational risk that comes with governance by rough consensus. As Walch points out in her chapter, rough consensus works, evidenced by 99%+ uptime (including in crisis governance situations). Further, mitigation of ‘operational risk’ is an existential need for Bitcoin/Ethereum & progeny. This is why the networks have proven to be so resilient. And this is why traditional financial institutions are so keen to latch onto (& build on top of), say, Ethereum.

Actors in the “broader financial system” are making those FMI decisions, and they should be accountable/responsible for those decisions if their decisions result in losses. The same is true for developers of “other critical societal systems” who want to graft their (say, decentralized identity) processes onto the Ethereum Merkle tree.

The key point here is that lots of different stakeholders are building financial and many non-financial applications (dID, games, dispute resolution processes, SCM processes, NFTs, DAOs, LAOs, etc.) on top of Ethereum and other blockchains. Stakeholders have baseline expectations that certain core characteristics of their blockchains will remain largely unchanged. Forcing blockchains to conform to FMI standards uproots these expectations and arguably contradicts their very raison d’être, with net negative economic and social effects.

Angela Walch: It is worth thinking through the implications of this governance model, particularly in the context of a public blockchain supporting financial market infrastructure (or any other critical public system, really). In considering the governance implications I describe in the following paragraphs, I ask the reader to imagine using this type of governance model with our military defenses (e.g., nuclear weapons) or in an intensive care hospital unit, to concretize how ill-suited this model is for high-stakes matters.

CleanApp: Please see the first point about the original intent of blockchains. Public blockchains were NOT invented to play a supporting role to existing or new financial market infrastructure (or any other critical public system, really). Public blockchains were invented to solve a very simple set of transactional/relationship problems: how to have peer-to-peer interactions while minimizing reliance on a trusted third party. Blockchains solve the simple peer-to-peer value/data transfer problem and the solution set is now being scaled to far more complex transactional (value) and non-transactional relational (eg, pure data) settings.

Are there prominent folks who disagree with this characterization? Yes, many; but these are folks whose primary motivation may be to legitimate their vast financial gains, as opposed to, say, further development of blockchain non-financial use cases (such as tamper-resistant climate datasets, tamper-resistant global legal datasets, etc.).

Angela Walch: Third, this amorphous governance model can lead to unacknowledged centralization of power, resulting in unaccountable or unchecked power. The core developers of public blockchains are more powerful than the rank-and-file developers on these projects.

CleanApp: 100% agree.

Angela Walch: The balance between concentrated and distributed power is difficult to strike, but the standard grassroots open source software development process [eg: rough consensus] appears too far along the spectrum of (nominally) distributed power to govern critical systems like financial market infrastructure.

ClanApp: Pls see above.

Angela Walch: “governance practices in public blockchains [eg: rough consensus is] unlikely to satisfy [the standard that] ‘FMI[s] should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system[.]’”

CleanApp: Imposing FMI standards onto public blockchains = capture of public blockchains by “the broader financial system.”

Angela Walch: Analogously, volunteer fire departments are relatively common in small towns, but cities pay fire departments to fulfill this important public function — the scale of the systems seems to dictate a more formal structure being needed in the more populous cities.

CleanApp: How did hyper-formalism work out for Notre-Dame de Paris? The point is that decentralized systems and processes do certain things much better than centralized systems and processes. This is as true in biology, computer science, as it is in economics, the social sciences, academia, etc. In fact, the law itself if one of the best examples of a set of systems and processes that is, arguably, optimal in a decentralized form.

5. Blockchain Law & Global Policy

The key point above is that, if blockchains are classified as financial market infrastructure, they become legally obligated to “support the stability of the broader financial system.”

Screenshot of Angela Walch’s ‘Open-Source Operational Risk … ‘ p. 12 (emphasis added)

But if the standard says “should” not “shall” — who says these are legal obligations? Well, first, Angela Walch, when she elucidates the normative and doctrinal structure behind “global standards [plural] for financial market infrastructures [plural].”

Below are some of the institutions (plural) that set some of these standards (plural). Emphasizing the plural nature of these standards and institutions is crucially important because the legally binding nature of these standards often comes about in the cloudy interstices and interactions of these multiple standards, as practiced by different actors in these various institutional settings.

Do you know who these folks are? CPSS (Committee on Payment and Settlement Systems), BIS (Bank for International Settlements), OICV (Organisation internationale des commissions de valeurs), IOSCO (International Organization of Securities Commissions)?

IOSCO is a member of, participates as an observer in, or coordinates with a number of other international organizations, including the OECD, FSB, Financial Action Task Force on Money Laundering (FATF), IASB, PIOB, IMF, World Bank, and European Commission.

Who else sets FMI standards? Here’s a great excerpt from Walch, highlighting the U.S. Federal Reserve Board (Fed)’s definition:

Financial market infrastructures are “multilateral systems among participating financial institutions…used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions,” which “include payment systems, central securities depositories, securities settlement systems, central counterparties, and trade repositories” (Federal Reserve 2016, p. 3). These systems allow our vast economies to keep track of who owns (and owes) what.

6. Whoa-lly Moley!

There are well-trained people whose core expertise is to argue that what you just read is just fear-mongering. These silver-tongued folks can easily argue that these standards are non-binding, optional, just recommendations, really. These are just precautionary measures designed to make sure “the system” works well. Those folks are called lawyers.

Those very same lawyers can just as easily argue that those optional, non-binding, purely “persuasive” standards are actually … legally binding.

What’s the authority for that proposition? The very same ‘standards’ & ‘principles’ for financial market infrastructures referenced above (PFMI 2012)

It’s all right there in Principle 1, … Principle 3, … Principle 2.

And especially in the gray areas between those various ‘principles.’

7. Are You a Crypto Financier?

Do you think your crypto lawyers are ready to defend ‘your’ blockchain(s), dApp(s), or DAO(s) from an expansive and aggressive application of these various principles by opaque international organizations and their multitudes of domestic enforcement organs?

Let’s get real.

The principles on which the financial systems are built require financial infrastructure institutions to support — NOT disrupt or supplant, but “support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.” (Principle 2, PFMI, 2012). That’s literally, “support the system on the system’s terms!”

If these are the stakes, then why are some crypto people willing to sell and betray the long-term promise of the blockchain revolution for a little bit of near-term financial gain? That’s an important question for future historians.

The more urgent and interesting question isn’t about what’s motivating other people. It’s about what motivates you.

Do YOU think the alphabet soup of IFIs above thinks of you as a “relevant stakeholder” — ? Do you think YOUR interests align with how the “relevant stakeholders” view “relevant public interest considerations” — ?

If you do, here’s wishing even more financial “empowerment” to you. Enjoy the steak and view from your imaginary citadel:

But if you see that your interests (including your financial interests!) may not necessarily align with the interests of institutions you may not have even known existed, maybe it’s time for peel back from the crypto finance fetish a bit, eh?



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