Distributed ledger technology is still confusing people, largely because it is still at an early phase. Once it matures and regulators agree on standards, the benefits will become clearer – but it will take time, says Chris Skinner.

Having spent a day facilitating a series of roundtable discussions focused on distributed ledger technology (DLT), I realised that there is a lot of confusion around the subject.

I still get confused, even after dedicating hours to the subject. When is a distributed ledger needed? What’s the difference between a distributed and a shared ledger? Does a distributed ledger need a blockchain? What is the difference between a distributed ledger and blockchain? Does the distributed ledger need a token currency to work? Which currency should you choose? And so on.

Questions, questions...

Maybe that is why the people participating in the discussions were confused too. When asked what questions they wanted to answer, the list and comments grew long quite fast:

- How and why should we be using this technology, what are the costs, where are the savings and who can do the implementation?

- I’ve been hearing that blockchain will change the world for a few years now, but it has not happened yet. Will it ever happen? What will make it happen?

- How do distributed ledgers relate to crypto-currencies – do you have to have a currency to run a ledger?

- How secure is this technology, as I don’t like the idea of open and transparent systems?

- With so many blockchain platforms and distributed ledger developments, start-up companies and changes, it is hard to know where to focus and which of the companies will win.

- How can we get all the players to agree on standards and, if there are so many blockchain systems, how will we create interoperability?

- The tangible development of distributed ledgers seems a way off and open banking is far more tangible because it has a regulatory mandate behind it.

- We have had a proof of concept, but cannot find any compelling use case.

Expectations too high?

It was quite wearying in some ways, as there seemed to be a lot of negativity. Maybe the hype led to great expectations, few of which are being delivered.

A subject matter expert joined me to answer all their concerns and questions, and the dialogue went along the lines of: “This will be a transformational technology, but we have to solve issues of trust and structure first before we apply such technology. For example, clearing and settlement needs central banks, counterparty clearing and custodians to agree the way forward before it can be applied to that area of operation. Digital identity needs government authorities to agree on what is acceptable as an identification before it would be legally accepted in court. This is true of many of the big-ticket items that will be resolved by shared databases of trust.”

We talked a lot about when you need a distributed ledger, and the fact that it is only relevant where you have multiple parties who need access to a database and where you don’t trust those different players.

The immutability of distributed ledgers, and the fact that they are stored on multiple decentralised systems, not just one centralised database, makes them work. If you trust the third parties, you don’t need a distributed ledger. If a central authority can run the database on behalf of all, you don’t need a distributed ledger.

The fact that it is immutable and tamper-proof makes DLT trustworthy: that is its core benefit. The fact it is distributed makes it resilient and reliable. The fact that it can be shared with trust by all concerned over the internet makes it cheaper and limitlessly scalable.

This did not alleviate all the issues, however, as there is still a lot of confusion. In particular, I wrote down Bitcoin, Bitcash, Ethereum, Ethereum Classic, Stellar, Ripple, zCash, Litecoin and more, and thought yes, it is hard to work out where to place your bets.

Early days

But then this is the core of where we are right now: blockchains and distributed ledgers are an experiment. There is no certainty with this technology currently; we may see more forks and disagreements of direction, and we may see some crypto-currencies and platforms implode.

This is why, when the Bank of England, the Bank of Canada and other authorities trialled and tested distributed ledgers for real-time gross settlement, they took the view that this technology is too immature and it is too early for prime time.

However, as the authorities agree their future directions and solve the barriers to implementation, and as the technologies themselves mature and become more reliable, we will see DLT transform complex structures through shared ledgers of trust.

For me, it still comes back to the basic issue of any new technology: we overestimate the speed and underestimate the impact of change.

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.

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