BIS Economist Proposes "Embedded Supervision" to Enhance Transparency of Tokenized Markets

Lucas Cacioli  Sep 17, 2019 12:00  UTC 04:00

1 Min Read

Economist Raphael Auer of the Bank for International Settlements (BIS) has championed distributed ledger technology (DLT) as a way of supervising financial market risks.  

Essentially, Auer purports that, “The spread of distributed ledger technology in finance could help to improve the efficiency and quality of supervision. In his recently released working paper, Auer made the case for ‘embedded supervision’ which leverages machine learning or artificial intelligence and effectively creates a framework that allows compliance with regulatory goals to be automatically monitored by reading the market's ledger, thus reducing the need for firms to actively collect, verify and deliver data.

The paper explains that DLT and smart contracts can be leveraged to create new forms of transparency and data credibility for the development of financial markets and can eventually eliminate the need for any third-party data verification. Auer writes that there is a necessity for regulators to establish auxiliary frameworks to govern distributed markets, however, DLT would ensure a more cost-effective and higher quality of compliance. He concludes, “Embedded supervision could further help maintain the confidentiality of firms and their customers, since cryptographic tools can be used to report an institution’s aggregated financial exposures to the supervisor without disclosing the underlying individual transactions.”

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