Blockchain – more problems than solutions? - Comment & Profiles -

A huge amount of brainpower has gone into using blockchain in finance but widespread application is still a long way off, writes Brian Caplen.

After all the initial hype about blockchain there has been a long, testing period with mixed outcomes. For example, Germany’s central bank president Jens Weidmann recently said, as reported by Bloomberg, that a trial project to transfer and settle securities and cash using blockchain had turned out more costly than the old-fashioned method.

In a new report, however, McKinsey makes three use cases for blockchain. However, this was not in the more heavily trialled areas of post-trade settlement or back-office processes, but in retail banking. These are for remittances, know your customer (KYC) and identity issues and risk scoring for the underbanked.

The logic for these is sound enough. Remittances is a business that the banks have largely lost to the fintechs and so the potential speed and cost savings from a blockchain system could help to win it back. Efforts to counter fraud have led to more costly onboarding that could be simplified with KYC and anti-money laundering checks all rolled into a single process. Risk scoring for the underbanked, using  blockchain to pull in lots of anonymised transactional data, could assist in quick micro-credit decisions.

Even so, we’re still talking about huge hurdles to get from A to B (also cited in the McKinsey report) such as the lack of fungibility between crypto and fiat currencies in the case of remittances, heavy capital costs and the need to share data in the case of KYC, and the need for a big uptick in processing power in the case of risk scoring.

With AI and the cloud offering such upside potential, it is hard not to conclude that blockchain solutions are still a long way off. 

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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