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Blockchain is about to take off but there are hurdles ahead

The global community developing distributed ledger technology-based applications for global finance must resolve issues of security, privacy, law and computer processing capabilities before we see the first wider uses of blockchain in the financial industry.

If regulation in the financial sector – or in any walk of life – is all about establishing a set of agreed rules and ensuring that all participants adhere to them, thereby creating a secure, safe environment in which participating members of the group can trust and interact with each other – then blockchain in many ways will do the regulators' jobs for them. Blockchain is “a regulator’s dream come true”, writes IBM's Keith Bear in his blog published on Finextra.

He looks at what financial regulators around the world are doing in terms of adopting distributed ledger technology (DLT) – including the following key initiatives:

  • US: the Securities and Exchange Commission (SEC) has formed a Distributed Ledger Technology Working Group;
  • UK: the Bank of England's FinTech Accelerator is looking at privacy in distributed ledger systems;
  • Japan: Financial Services Agency of Japan has begun a series of initiatives on blockchain technology in international financial context.

These regulator-led initiatives, together with the intense research and development from the likes of Ripple, R3 and Hyperledger, are developing some of the key user-cases as well as tackling some of the stumbling blocks.

Blockchain user-cases

We all know that blockchain has the potential to considerably change how companies trade with each other, from payments to trade documentation. Blockchain is the technological basis for smart contracts, which manage the exchange and recording of data, as well as payments, in the supply chain. As Shantanu Ghosh of Genpact writes in FEI: “This seamless and automated execution of transactional data could eliminate the potential for errors and get past-due invoices down to nearly zero. The same concept could be extended to procure-to-pay by leveraging smart contracts for purchasing goods and services.”

In the financial industry, blockchain is already being developed for applications such as:

  • supply chain management;
  • cross-border payments;
  • global remittances; and
  • data and central registries.

Hurdles up ahead

We also realise though, that blockchain is still in its infancy and hasn't quite managed to take off yet. So what's holding it back? Here are some of the hurdles to overcome before blockchain really becomes a viable part of the financial industry:

  1. A blockchain standard is needed. There are currently 15 distributed ledger platforms under development so it's not clear how these will collaborate to produce one global standard.
  2. Security issues for blockchain include the security of cryptographic keys and access credentials. The Federal Reserve also points out that “users can potentially suffer immediate and irrevocable monetary losses without recourse if keys or access credentials are lost or compromised.”
  3. For bitcoin, it's not possible to bind the identity of public keys to an individual or a corporate identity, which is an important privacy-related point. Transactions are often subject to anti-money laundering regulations, in which identity is a key part of compliance. This is an issue for blockchain-based transactions that will have to be solved before DLT-based transactions become more widely used.
  4. There are legal questions over which country's jurisdiction would apply to blockchain transactions, seeing as they are not identifiable in terms of location or a sovereign currency.
  5. Processing transactions, contracts or other types of data based on DLT is computationally intensive and we don't yet have the processing power to do this on a global scale so that payments are near-instant. This means that blockchain-based systems are not yet ready to be used in processes where speed is of the essence, such as clearing & settlement and stock trading. ACI Worldwide's Roger Oliphant writes in this blog: “Currently the math, which is CPU-intensive can only support single digit to tens of transactions per second. It’s a bit of hurry up and wait!” However, Oliphant also notes that “a lot of people are working on this”, including Hyperledger, IBM, Ripple and Etherium. He thinks it's likely that, within a year, the blockchain development community will be able to release open-source code that enables more than 1,000 transactions per second.

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By Emelia on 2nd Jun 2017:

Well i think it will help the supply chain management because supply chain consists of financial data. The processes will be eventually be more effective and efficient and it will also help for the success of the company.

BR International Supply Chain Consulting

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