Beyond the Hype: A Critical Look at Blockchain Technology

Blockchain technology has been hailed as the next big thing in banking that can save financial institutions (FIs) significant amounts of money. It is viewed as an opportunity for fortunes to be made and limitless problems to be solved through its seemingly “magical” technology. However, while the blockchain allure is all too appealing for banks, the promise of blockchain being able to deliver value is not entirely realistic.
The blockchain is a type of database that addresses concerns related to verifying, validating, and recording transactions involving multiple parties. By ensuring atomicity and authenticating transactions, the technology maintains trust and upholds the established rules. Although the decentralized nature of the blockchain is its primary benefit, it is also the most significant obstacle it faces.
One challenge is that blockchain is expensive. While most blockchain implementations today have incorporated some form of digital currency as a means for developers to monetize their technology and ensure the integrity of transactions, these transactions have proven to be prone to price volatility. FIs have zero control over the cost of transactions, and by using a blockchain platform, they are effectively relinquishing their price control to an entity that can arbitrarily add more coins into circulation and enrich the founding owners while reducing shareholder value for the company.
Furthermore, blockchain requires an investment in hardware since each participant must maintain some “chunk” of the chain. While the database is distributed, an FI will still need to subsidize its use through its infrastructure. At the writing of this article, the Bitcoin blockchain is approximately 400GB in size and averages 250 thousand daily transactions. This raises fundamental issues with how these technologies will scale.
Lastly, in the American system of banking, issues concerning validating, confirming, and recording transactions between two or more parties have been solved long ago. While Blockchain is an attempt at solving real-time payment settling this primary issue is that Blockchain is inefficient. Blockchain technologies can take anywhere between 10 to 60 minutes to process a transaction. The time to record transactions is incredibly long, and the power requirements to support these networks can be environmentally deleterious. While this may be faster than current systems, there is a more direct way to accomplish this.
Despite these challenges, blockchain also presents some opportunities for FIs. Blockchain technology discussions can serve as a catalyst for promoting interbank standards and technology sharing. While Blockchain may not be the fundamental technology that drives this innovation, it can certainly be seen as a way to start a healthy dialog in the industry.
One way FIs can collaborate is by forming a consortium to promote interbank standards and a jointly-owned clearinghouse. This will not only benefit FIs by working for joint standards but also ensure that no one party is unfairly enriched by the technology. Such a consortium would also enable FIs to benefit from shared resources, reduce duplication of efforts, and promote interoperability.
In conclusion, blockchain technology is a revolutionary technology that has found many good uses outside of typical banking. While it presents some challenges, it also presents some opportunities for FIs. FIs need to work together to overcome these challenges and unlock these opportunities by promoting interbank standards and a jointly-owned clearinghouse. By doing so, FIs can benefit from shared resources, reduce duplication of efforts, and promote interoperability.