So, it’s intensifying. From dismissing bitcoin to grudgingly admitting that the blockchain might be interesting, to tiptoeing around more in-depth research, banks now seem to be rushing to experiment with or even outright buy the technology. Let’s take a look at why, and why we won’t see much change in how banks work any time soon.
A large part of the banks vs bitcoin debate revolves around the nature of the blockchain. Bitcoin’s blockchain is decentralized (no-one controls it), permissionless (anyone can use it) and public (all transactions are there for anyone to see). Does that sound like something a bank would be interested in? Something that no-one controls and anyone can use? Something that openly publishes transactions? Not any bank that I know of, anyway.
But surely a bank could adapt it for internal use? Yes, but why would they want to do that? The blockchain works more slowly than a database, and is more expensive to run. If what they want is an efficient way to transmit value internally, a database is much more useful.
What if they want the “permanence” of the blockchain record of transactions? What if they need to know that each transaction, once included, is very difficult to modify, increasingly so the farther back in time it goes? The blockchain is more secure than a database, true, since if a historical transaction is modified, every single subsequent transaction block also needs to be modified. But what if the blockchain is controlled by one entity? What’s to stop it from changing whatever it wants? The system is secure because it is public. A private blockchain is not so secure.
So, why are banks looking at it? In part because of the hype. Blockchain talk is almost everywhere, and if others in your sector are looking into it, you don’t want to be left behind.
And there is value in the notion of a private chain. For a single entity, the expense of the blockchain doesn’t make much sense. But for a group working together, the transparency, security and automation could lower costs and increase efficiency. A supply chain could use a blockchain-like system to pass documents from one stage to the next, for example. The participants would be all entities involved in the process, that don’t necessarily trust one another, and that want the transparency and group verification that the blockchain can offer. Or, a group of banks could create a private chain through which they could enact certain transactions, such as the hand-over of loans, or the exchange of securities. Developer R3CEV recently trialled a chain-based transaction with the participation of a consortium of 11 banks. And the blockchain’s use in securities settlement is potentially fraught with legal barriers, but if they can be worked out, the gain in efficiency and liquidity will be huge.
So, as with most hyped-up innovations, the blockchain is unlikely to be the explosively disruptive force that the media makes it out to be. Its use in private situations is limited. The sector is buzzing with activity, though, as very bright minds research and experiment, for small startups and for large institutions. The results will no doubt produce even more innovation and use cases, some of which will surprise us all. The internet today is used in ways the original developers never imagined. But its impact is unquestionable. We could well see the blockchain acquire the same status: part builder, part destroyer and part transformative magician.