“Blockchain” is the word on the street these days, with every significant financial institution experimenting with this new technology. Many say that this remarkable innovation could radically transform our financial system, eliminating the costs and inefficiencies that plague our existing financial infrastructures. Venture capital investments are pouring into blockchain startups, which are scrambling to disrupt the “quadrillion” dollar markets represented by existing financial market infrastructures. A debate rages over whether public, “permissionless” blockchains (like Bitcoin’s) or private, “permissioned” blockchains are more desirable.

Amidst this flurry of innovation and investment, this paper inquires into the suitability of the Bitcoin blockchain to serve as the backbone of financial market infrastructure, and evaluates whether it is robust enough to serve as the foundation of major payment, settlement, clearing, or trading systems.

Positing a scenario in which the Bitcoin blockchain does serve as the technology enabling significant financial market infrastructures, this paper highlights the vital importance of functioning financial market infrastructure to global financial stability, and describes relevant principles that global financial regulators have adopted to help maintain this stability, focusing particularly on governance, risk management, and operational risk.

The paper then moves to explicate the operational risks generated by the most fundamental features of Bitcoin: its status as decentralized, open-source software. Illuminating the inevitable operational risks of software, the paper argues that these technology risks are exacerbated by the governance risks generated by Bitcoin’s ambiguous governance structure. The paper then teases out the operational risks spawned by decentralized, open-source governance, including that no one is responsible for resolving a crisis with the software; no one can legitimately serve as “the voice” of the software; code maintenance and repair may be delayed or imperfect because not enough time is devoted to the code by volunteer software developers; and consensus on important changes to the code may be difficult or impossible to achieve, leading to splits in the blockchain.

The paper concludes that these operational risks, generated by Bitcoin’s most fundamental structures significantly undermine the Bitcoin blockchain’s suitability to serve as financial market infrastructure