Blockchain: where it works, where it doesn’t

To some, blockchain is as revolutionary as the internet. To others it is overhyped. Despite all the furore around the cryptocurrencies using blockchain, they currently account for less than 0.5% of global money supply and an even smaller fraction of daily foreign exchange turnover. They also have very limited transaction capacity. Bitcoin’s is three to four transactions per second, which compares woefully to Visa’s 4500 transactions per second.

For this reason, as well as security concerns and lack of user friendliness, analysts at the German private bank Berenberg dispute the idea that cryptocurrencies will ever dominate retail payments.

There is also the matter of the huge electricity consumption involved in ‘mining’ cryptocurrencies that hinders their competitiveness. “ Were crypto to grow to, say, 5% of global [money supply] (from less than 0.5% today), we calculate it would require 10% of the energy consumed by China,” says Berenberg in a recent report.

Bank of England governor Mark Carney is one of many voices to have recently called for proper regulation of cryptocurrencies. Yet banks are pouring investment dollars into the underlying blockchain technology, with Citi and Goldman Sachs featuring in a list of the top five largest investors. In areas of finance where processes are still manual and relying on faxes and telephone calls to relay and gather information, blockchain’s advantage is becoming apparent.

Seven banks, including BNP Paribas, BNY Mellon, HSBC, ING and State Street, are working with IT firm Finastra to create an online marketplace for syndicated lending deals using R3’s blockchain platform. These banks account for 10% of the syndicated lending market so the project’s success would be significant.

Finastra CEO Nadeem Syed says: “The use cases for blockchain will be where current processes are inefficient and where the information is in silos and can be put in a common, secure repository to gain efficiencies. This is true for examples such as syndicated lending, trade settlement in capital markets and trade and supply chain finance. It is less true for payments settlements that are already quite efficient. Further, the scalability needs of payment settlements far outstrip the current scalability of blockchain.”

Even so Mr Syed thinks that the final goal of transacting with smart contracts in the syndicated lending market is still a few years away. The first step is information sharing and collaboration.

Blockchain’s scaling problem, together with the high energy use of cryptocurrency mining, suggests that for now it is more suited to wholesale banking solutions with limited participants than the mass market.

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

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