OPINION: Blockchain Not a Fit for Wall Street
Despite all the buzz the financial press is giving blockchain, it is an imperfect technology for Wall Street.
It has only received this much attention due to bitcoin’s air of mystery and subversiveness, which the blockchain powers.
To understand why financial institutions are so interested in blockchain, it is important to understand what bitcoin is and how it works.
The bitcoin’s dirty little secret is that it is not a truly anonymous currency. Every bitcoin transaction has its counterparties, size and time recorded into a ledger, known as the blockchain.
Bitcoin security relies on having multiple copies of the ledger hosted across the Internet. Anyone with an Internet connection can download a copy of the blockchain and host it.
This distributed nature prevents any one party from having undue influence over the database as well as making it near impossible to hack.
In plain geek-speak, blockchain is an immutable distributed database. Once a user enter transactions into the blockchain, they’re there for good. There is no way to go back and alter entries.
However, bitcoin’s democratic nature, which makes it the most successful crypto-currency, is why it would not work in financial services.
When Satoshi Nakamoto first proposed his peer-to-peer cash system in 2008, he was not thinking about the enterprise. Instead, he designed the bitcoin protocol to operate on everything from a desktop system to the beefiest of servers.
As a result, the blockchain network registers approximately seven transactions per second, which is hardly robust enough for financial messaging volumes.
Programmers can tweak blockchain’s open-sourced software to increase its performance, but that leads to the financial service’s next problem — the lack of standardization.
There already are a number of startups offering blockchain-esque platforms, but currently there is no industry consensus on which blockchain alternative the industry should adopt.
Firms like UBS, RBS and Nasdaq OMX have made headlines over the past few months with various blockchain implementations.
Institutions can select to deploy any platform for strictly internal use. But if they want to interact with other organizations, they will need to select an industry standard.
This is why the R3 consortium is such a good thing. It has signed up 25 of the largest global and regional banks to develop an industry standard.
Given the resources that all of the participants can muster along with their drive to succeed, it just is a matter of time before the industry develops a financial services-friendly alternative to bitcoin’s blockchain.
Featured image via iStock
DLT networks or tokenisation platforms have the potential to transform post-trade.
As ASX moves to replace CHESS, market participants look to what else the technology can deliver.
Proof of concept lays the foundation for a leap in efficiency in post-trade services.
The Monetary Authority of Singapore’s Sandbox Express has accepted BondEvalue for testing.
The nascent asset class will benefit from more liquidity and regulation.