Nine reasons why banks aren’t using blockchain

" Any financial institution (or anyone else for that matter) in the trust business ignores blockchain at their own peril."
Christian Venter, GM Consumer Digital Technology, ANZ

Despite the simplicity and popularity of blockchain technology, the traditional financial services sector has been slow and even reluctant to put their toe in the water. 

The reality is the application of the technology behind blockchain is very new. It’s doubtful you will see significant adoption in mainstream banking within the next five years. 

Still, blockchain is and will be a revolutionary technology. Any financial institution (or anyone else for that matter) in the trust business ignores blockchain at their own peril. It’s why most of the big banks are experimenting with it right now and why picking a standard at this point in time is not necessary.

What is important is solving the limitations the bitcoin implementation of blockchain has in order to allow mainstream adoption in Banking. ANZ is currently working on proof of concepts and with organisation like Hyperledger to design simpler, more effective and lower risk solutions.

Below are nine key reasons why blockchain is taking so long to be adopted by the mainstream.

• The banking industry is highly regulated and banks are naturally very cautious. Most of the big banks are piloting the technology and cautiously dipping their toes into the water.

• Scalability. Visa today handles about 2000 transactions every second. Blockchain for bitcoin is currently limited to four to seven transactions per second because the protocols in bitcoin limit the size of transactions blocks to 1mb. Obviously a major limitation, although some of those organisations mentioned above are working on solutions to scale blockchain. Bitshare, for example, claims to be able to process 100,000 TPS.

• Security. While extremely secure, the technology implementation of something like bitcoin is unregulated. A group of individuals with gigantic computing power could theoretically establish their own chains as a definitive version and hijack the bitcoin block chain.

• Bitcoin implementation is decentralised and unregulated. This creates mistrust and if things go wrong. Who do you sue? How do you implement compliance, anti-money laundering and know-your-customer regulations?

• The implementation and use of blockchain solutions are very new. There are also very few people who really understand it and what its capabilities and limitations really are.

• For blockchain technology to be effective it relies on cooperation and co-ordination.  How likely is it banks all over the world competing for the same customers with similar products will choose to truly co-operate? One could argue they already have with SWIFT but this requires a standard for them to agree on and its early days for this to occur.

• Human nature. The saying from the 1980’s, “No one ever got fired for buying IBM”, still applies, especially in highly risk-averse regulated industries like banking.

Adopting blockchain-based payment processing will require leaps of faith and risk sadly very few will undertake at large scale until it is forced on them.

Let’s say you a CIO and decide to take this leap of faith, who do you pick to take it with?  Ripple, R3CEV, Bankchain, TRUST, Sidechains, Bitshare, HyperLedger, SWIFT GPII ? It’s early days and too soon to pick a winner. Beta or VHS ? USB3 vs Firewire vs Thunderbolt ? It may well be too soon to decide.

•Regulation could conceivably be part of the solution. The creation of a central governing body to regulate the financial services blockchain and its membership could help, but if history holds true, by the time this happens some new disruptive technology will probably be in place.

•While complex and costly, the current banking infrastructure that securely and safely transfers our money works very well. Unwinding this is unlikely to make it to the top of too many banks CEOs to-do lists in the short- to medium-term.

The world’s top 1000 banks earned over $US940 billion last year in profits. There are estimates floating about from Santander that banks can save $US20 billion if they used blockchain technology. 

Given cost complexity and the time required to roll it out, something like blockchain globally on the scale of these figures puts the likelihood into perspective.

This story is an excerpt of the BlueNotes longread “Everything you’ll ever need to know about blockhain”. Click here to read the full story.

Christian Venter is GM Consumer Digital Technology at ANZ