by Joseph Young
Major financial institutions and banks that have spent hundreds of millions of dollars in funding and resources for the development of various blockchain-based applications and platforms are struggling to create a working product for mainstream users. Credit Suisse, a Swiss multinational financial services firm, has identified eight major barriers between the blockchain technology and mainstream users in a recent report.
Credit Suisse has been one of many financial establishments that have called for the development of blockchain-based financial systems. In a newly published 135-page report, Credit Suisse went as far describing bitcoin a “niche player,” while portraying its underlying technology, the blockchain technology, as the safe option for banks.
“Enter blockchain – a low-cost, instant, virtually unhackable, fully automated, end-to-end transaction system built on a private permission-based network. Such a system would not only enable banks to eliminate overhead costs, but would provide a lower-cost money transfer product attractive to large multi-national organizations with high frequent cross-border funding and trade finance demands,” reads Credit Suisse’s report.
If banks see this potential in the blockchain technology, why haven’t they been successful in implementing it? Credit Suisse identified the following eight reasons:
Security vs Cost Trade-off
Credit Suisse accurately described the core difference between the Bitcoin network’s blockchain and a private or permissioned blockchain network. The computing power which supports the bitcoin network, which is more commonly known as hash power, is the basis of the network’s security. Thus, the higher the hash power, more powerful and secure the network becomes.
However, banks are attempting to create a permissioned network in which certain administrators are granted the authority to manipulate, reverse, or block transactions at their will. Banks are increasingly exploiting the application of private blockchains because of the strict financial regulations they are required comply with.
Misconception on the Relevance of Blockchain
The blockchain technology has been referred to as an international phenomenon which can solve any data-driven and financial issues large establishments deal with. This conception of banks and financial institutions have backfired against them, as they began to realize the difficulty behind the implementation of the blockchain technology, especially the integration onto their existing IT systems.
Credit Suisse believes that the R3 consortium and other organization of top-tier financial organizations are off to a good start. They have formed an association to create a blockchain network that can be used by multiple banks and their users. Credit Suisse states that the actual issue lies behind the users of the network. If users and banks can’t agree and work together on the network, the blockchain network loses its value and practicality.
A blockchain network’s value is heavily dependent on the data it stores. The Bitcoin network for instance, stores massive amount of transaction data that are being used by millions of people around the world. If banks can’t utilize the blockchain to store useful data, the blockchain network shouldn’t be integrated into their systems.
Any blockchain networks at early stages are prone to hacking attacks. Commonly known as the majority hashrate attack, anyone or any mining pool with 51 percent of the network’s computing power can hack the chain, redirecting transactions and preventing transactions from being settled. If banks integrate a blockchain network that is vulnerable, millions of transactions and transaction data could be compromised.
Credit Suisse explains that data verification is crucial on a blockchain network. While it is fairly simple to anchor data on a blockchain, it is difficult to maintain that data and secure it. The bank’s analysts explain that, “Although identity can be encrypted relatively easily on a blockchain, transaction data are not for the simple reason that nodes have to see it to verify it. This may be an issue for those concerned about data privacy.”
On and Off-Chain Identity
Lastly, Credit Suisse described the importance of keeping private keys safe. If private keys are lost, assets and transactions can be lost. “The issue with bearer instruments is you can lose them; cash being the most salient example. A better solution to reconciling on and off-chain identity appears necessary.”
The DAO hack illustrated that, “Nascent code is susceptible to bugs before it is truly tire kicked, and even then, complete surety is never guaranteed. This leads us to wonder if the ‘smart contract’ can ever truly do away with the wet-signed, lawyer approved, paper contract.” Also, Credit Suisse’s report stated that Ethereum’s hard-fork sets a precedent for ‘truth management’ to reduce the immutability of blockchains.
With the blockchain technology becoming more popular amongst financial institutions, they are most certainly more eager to implement the blockchain technology to demonstrate the efficiency of the technology. The efforts of institutions like Credit Suisse to evaluate the problems dealt by financial organization can optimize the development of blockchain-based systems.
While Credit Suisse stresses blockchain over bitcoin, experts such as Andreas Antonopolous questions the separation of the two concepts, calling it ‘misguided’. In a recent interview, in response to the question of which blockchain will be the best amidst the potential rise of permissioned blockchains from incumbents in the financial sector, he stated that,
“The question is whether immutability is an important characteristic. Bitcoin has strong (thermodynamically guaranteed) immutability, because of expensive energy-dependent proof-of-work. Most other ‘blockchains’ do not have that. Is that useful?…I think it is very very useful, very valuable for some applications…”
Furthermore, Antonopolous also went on to say,
“The focus on ‘blockchain’ to me is misguided. The most useful blockchain is the open, global, transnational, decentralized, uncensorable, open-to-all, immutable, innovation-without-permission blockchain. For now, we have only one of those at very large scale and that is bitcoin.”