Guest Commentary: Carl-Ludwig Thiele
(This commentary appeared in SAFE Newsletter Q3 2016)
Blockchain and Fintechs as Possible Game Changers for Payments
Blockchain and fintechs have propelled transaction banking into the focus of public attention. Certainly, the term disruptive technology – meaning blockchain or distributed ledger technology – describes the idea that a technology may be abruptly substituted by another one.
For most of the players in this field, the interest no longer lies in realising the vision of an independent virtual currency which could render banks and even central banks obsolete. Efforts are currently centred on evolving the blockchain into a basic technology capable of facilitating allocation processes across companies. Blockchain technology promises cost savings, de-risking potential and efficiency gains through shared databases (rendering reconciliation processes superfluous), the automation of work-sharing processes (making interfaces functionally integrated) and smart contract solutions.
The blockchain, then, is a decentralised database which automatically verifies conditional and unconditional transactions in scarce, digital goods. By coupling blockchain transactions with predefined processes it is possible to achieve an automated process management of complex transactions between mutually independent institutions without resorting to a central reconciliation process.
But not every promise made is a promise kept. Not every innovation proves a success. With regard specifically to Bitcoin, the basic idea behind the blockchain has drawbacks that will need to be remedied before it is fit for use in financial transactions:
- The technology has to be scalable to ensure it is quick and efficient enough.
- To date, the technology does not offer absolute finality because there is always the theoretical danger of a reversal. But in the financial markets legal certainty (ideally, immediate) is a necessity. It must be for sure whether or not a transaction has been carried out.
- To date, blockchain technology as a data transfer tool is too costly as storage requirements and energy consumption are too high.
Many developers around the globe are tackling these problems – at central banks, too. Endeavours to cooperate on an industry-wide level are clear to see; we cannot expect major advantages to materialise until the allocation processes of mutually independent entities are harmonised. Otherwise, the blockchain would ultimately become just one more tool for enterprises to optimise their own in-house process management.
Implementation problems for application-oriented interfaces between blockchain technology and business systems themselves are increasingly garnering interest. On the one hand, a number of developers seem to have underestimated the complexity of real transactions and of replicating them using the blockchain. On the other hand, it would be over-simplistic to compare the functionality of the first blockchain pilot projects with that of real systems that have matured over the years. This is particularly the case if we consider the blockchain as not just another technology to replicate the same business processes, but as a technology that will facilitate a whole new world business of processes in the medium term.
The prime concern for central banks is initially to grasp the functionality. When and only when we know that use of this new technology is at least as secure, efficient and cost-effective in financial transactions as conventional technology, further questions can be asked, for instance regarding the issuance of central bank money using blockchain technology.