What's Really Holding Back Blockchain in Financial Services

By Grody, Allan D. | American Banker, July 12, 2017 | Go to article overview

What's Really Holding Back Blockchain in Financial Services


Grody, Allan D., American Banker


Byline: Allan D. Grody

Starting out on a technology journey is never easy. History has taught us though that by starting the journey the path will become clearer and solutions will follow.

The telephone was thought of as a foolish venture. Too many human operators would be needed to connect all those calls. Who would have thought, 75 years ago, that marrying a teletype to a telephone and then a telephone to a television would result in something close to Dick Tracy's wristwatch -- a portable device allowing instantaneous voice, video and text communication from everywhere to anywhere at any time?

Today, many blockchain experiments in finance are being converted to real-life applications providing meaningful solutions to existing problems, such as Nasdaq's private equity trading exchange, the Depository Trust and Clearing Corp.'s trade warehouse and credit default swaps platforms and IBM's bank consortium for international trade for small and medium-size enterprises. The technology is also finding new uses such as cloud storage, digital identification and a proliferation of non-central-bank digital currencies.

Most applications, however, are simply point solutions, replacing existing supply chain components with blockchain technologies, not the transformational disruptive vision for removing centralist supply chain intermediaries.

The real transformative vision, replacing the financial system's infrastructure of multiple ledgers with a single distributed ledger, needs a continuous regulatory rethink and additional technology upgrades. Most importantly, it needs to unlock the control over infrastructure by powerful centralists in favor of transaction flows amongst financial institutions themselves.

Regulatory accommodations are already evident, speedier transaction validation only needs time, and the centralists need a push by those in whose name they serve, mainly the largest 100 or so financial institutions, most of which regulators have pegged as globally or domestically systemically important.

In 1993 I was experimenting with the newly commercialized ARPANET as it was about to be rebranded the internet. We built one of the first commercial financial applications, an Investment site called INVESTORS Advantage. Every day I walked into the office asking "how slow is it?" In those days this was the critical issue.

There was no lack of vision as to what we could do with the internet's marvelous new communications capability and its dazzling presentation technology. But back then it wasn't fast enough, especially for the main large-value-transferring B2B applications in finance -- clearing, payment, settlement, and trade and position recordkeeping. But the speed issue is long a thing of the past.

Now the same thing about speed, that it's not fast enough, is being said about the use of blockchains, more specifically the two breakthrough components: distributed ledger technology (DLT) and cryptographic validation of transactions.

Like the internet before it, blockchain technology needs patience to achieve speed. "If you build it, they will come" is transformed in the blockchain space to "build it and speed will come".

Concerns about latency are understandable, given the recent bottlenecks and impasse over scaling the original blockchain, the one behind the digital currency bitcoin. Proof of work, the hard-to-find but easy-to-verify math problem that must be solved to write to a secure blockchain, requires powerful computers. But Moore's law has processing speed increasing twofold every 18 months, proportional to the density of the number of transistors per square inch, and large financial institutions can support a proof-of-work system's computer and bandwidth requirements. They can also leverage their permissioning role as the portal into the financial system, augmented by a watchful regulator sharing a node on the distributed ledger and, perhaps, each of the financial institutions' auditors as well. …

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