Challenges around scalability and cost pressures have resulted in an inability to create a viable commercial use case for blockchain technology, according to two bankers.
“We know that blockchain does suffer from scalability issues, which is one of the challenges,” said Rob Scott, managing director and senior banker at Commerzbank on a panal at the Capital Markets Innovation Summit in central London this week.
“Blockchain evangelists will not want to hear that it is all around a cost problem, but the reality is that the industry does have a cost problem, whether it is in trade finance, whether it is securities settlements, whether it is in core banking operations,” he said. “Certainly, if you look at a lot of the initiatives in blockchain today have all been around the securities space, a lot of pilots around issuance and all sorts of things, but nobody has really found that commercial model.”
In September the German Federal Ministry of Finance announced its blockchain strategy with the aim of reinforcing “Germany’s position as a leading technology hub,” said Olaf Scholz Germany’s Finance Minister in a press statement.
Part of the issue is that even when business is conducted on blockchain, it must also be put into the bank's traditional systems, according to Chad Giussani, head of operations for transaction reporting compliance, Standard Chartered Bank.
“We still have to manage our credit, manage our exposures, compress, confirm that all still needs to take place, even possibly replace some of the confirmation processes because everything is visible. But still for risk reduction we are going to have to compress positions with clients, we are not going to build that into the block. The results from transactions might be built into the block but with compression technology you just couldn’t build it anywhere near it."
For Giussani, blockchain “is only going to be as good as the community that use it.”
A report published by the European Commission in September shows the level of funding received by blockchain initiatives rose to €7.4bn in 2018, up from €3.9bn in 2017.
The trade finance market could be ripe for adoption of the technology because of its high dependency on paper, according to Scott.
“It is just about as manual as it gets,” he said. “So, I think blockchain technologies… lend themselves quite nicely to that problem sphere.
“The reason we are discussing trade finance is because that is a very easily quantifiable thing. It is paper, it’s people, it’s stamping, it’s risk, it’s bad actors, you can qualify digitising that ecosystem.”