The blockchain star is beginning to fade, but you shouldn’t write it off just yet, says Chris Skinner. 

Being conference season, there have been many announcements in the past few weeks about companies showing off their innovations. A good example is R3, which appeared at major transaction banking trade show Sibos, lauding its partnerships with Mastercard, Infosys, Wells Fargo, Bank of America, Marco Polo and more.

Prior to this, there had already been quite a lot of positive news for R3 around the world – but the media no longer takes notice of any of this because blockchain has moved from being a ‘good’ thing to being a ‘bad’ one. The media thinks it has tanked; it is a former technology; its promise is no longer there.

Disillusionment strikes

This particularly struck me in a Financial Times opinion piece by Jemima Kelly headlined ‘Blockchain: disillusionment descends on financial services’. The blockchain hype is fading.

However, the one paragraph that really stood out for me from this article was: “‘Blockchain’s failed promises could be a mandatory class in business school for how not to build a sustainable organisation,’ says Tim Swanson, head of market intelligence at blockchain company Clearmatics. He adds that, in most cases, entrepreneurs have just recast the same market, but with their technology the centre.”

If you don’t know Tim Swanson, he was former director of market research at R3, and a bull on blockchain. He still is bullish but clearly – like me, Jemima and almost everyone else – is disappointed with the pace of blockchain developments.

The fact is that blockchain has been a solution looking for a problem. It found the problem – centralised databases that needed a lot of human management to maintain – and offered the solution, which is autonomous databases that are decentralised and managed by the network. However, the problems it addresses, and its strongest use cases, are in areas that cannot be addressed by technology. They need to be addressed by humans.

For example, one strong use case is digital identity. However, digital identity is a hard nut to crack and requires lots of standards and agreements between governments, financial markets, businesses and administrations before it can be sorted out. Another strong use case is in clearing and settlement. But clearing and settlement requires agreements between central banks, exchanges, custodians, counterparties and central clearing authorities before technology can be applied.

That is why Blythe Masters, the financial markets poster child for blockchain, moved on from Digital Asset Holdings, and why blockchain is struggling to get past the experimentation phase: it is just not ready for prime time yet. This was highlighted in another recent report which stated that there is no commercial use case for blockchain in banking, as it lacks scaleability and the costs are too high.

Crucial issues

High costs and a lack of scaleability are big issues. The costs are too high because, as most blockchain use cases are being tested, banks have realised that they then need to reconcile these distributed ledgers with their traditional systems. The result is that it adds another layer of overhead, rather than removing one. (Note that it will remove overhead in the long term but the short-term issue is increased costs.)

The scaleability question is equally valid, and this is due to the technology still being in an early test and experimentation phase. I realised this when the Bank of England looked at using Ethereum for its new real-time gross settlement system – after an in-depth study with PwC it concluded that it is not ready yet. 

It is not ready yet… but it will be. 

For those who might read this and think I’m striking a negative note, I’m not. I still entirely believe that blockchain, decentralised ledgers or whatever you want to call them, will revolutionise everything. It is just complicated and, as noted, is related to use cases that have nothing to do with the technology but agreements about how to apply the technology. Those agreements are taking a long time, but they will come – one day.

Technology follows 

And, I guess, this is the critical point. Where we can apply distributed ledger technology and blockchain is typically in the most complicated parts of the financial system: digital identity, clearing and settlement, trade finance, supply chain, etc.

It is clear that an autonomous database of transactions can add value in these areas but the agreements about how this will operate must come first. The technology will always come second.

This is why blockchain is a problem looking for a solution, with the solution being first to agree how we might apply the technology. As I said, it’s complicated.

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

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