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Parma Bains
Technology plays an increasingly important role in financial services. With the pace of technological inno-vation moving ever faster, the role new technology plays in the provision of financial services is becoming increasingly fundamental. New technology can generate efficiencies for firms, lowering costs that can be passed on to end users. It can increase access to financial services and products for consumers, particularly the most vulnerable; however, new technology can also create new risks and unintended consequences that can harm financial stability, consumer protection, and market integrity. This primer is designed for financial supervisors at central banks, regulatory authorities, and government departments. It adds to existing literature by summarizing key aspects of popular consensus mechanisms at a high level, with a specific focus on how such mechanisms may impact the mandates of supervisors and policymakers when deployed in financial services markets. It could also help inform IMF staff on policy development and technical assistance related to crypto assets, stablecoins, and blockchains.
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represent the views of the IMF, its Executive Board, or IMF management. Publication orders may be placed online or through the mail: International Monetary Fund, Publication Services P.O. Box 92780, Washington, DC 20090, U.S.A. T. +(1) 202.623.7430 Contents Glossary I. EXECUTIVE SUMMARY II. INTRODUCTION III. WHY CONSENSUS MECHANISMS MATTER IV. PUBLIC AND PRIVATE BLOCKCHAINS: REGULATORY IMPLICATIONS A. Consensus Mechanisms in Public Blockchains Proof-of-Work (PoW) Proof

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data in a chain of blocks. Each block contains data that are verified, validated, and then “chained” to the next block. Blockchain is a subset of DLT, and the Bitcoin Blockchain is a specific form of a blockchain. Consensus mechanisms : Consensus in distributed systems is ensuring that a state, value, or piece of information is correct and agreed on by most nodes. A consensus mechanism guarantees this effort is carried out fairly and independently of any interested party, or in the case of private permissioned networks, to achieve other objectives desired by the

: 1. Every transaction is digitally signed making it non-repudiable. 2. Every transaction is vetted by two or more parties via a consensus mechanism (one cannot unilaterally enter information into the blockchain). 3. Data on the blockchain are immutable because multiple copies of it are managed by independent parties. It is also grouped into blocks and transactions are chained cryptographically, making it virtually impossible for anyone to tamper with information once entered. Finally, there is the longer-term challenge of how to manage the indefinite growth