Blockchain: a short-lived illusion or a real game changer?Experts discuss if, and how, blockchain can revolutionise payments
Blockchain has traditionally been a subject of mitigated opinions, due to its early association with bitcoin, the cryptocurrency adopted by techies all around the world, and also used on anonymous markets on the web. As the potential of blockchain is slowly being discovered, it is now getting the full attention of the banking and technology industries. Many major financial and technology organisations are exploring its benefits. For example, more than 40 international banks are part of R3, a New York City-based consortium assembled in 2014 and designed to produce research and development on the usage of blockchain in a financial environment. In December 2015, the not-for-profit, Linux Foundation, launched the ‘Open Ledger Project’, an open-source project bringing together IBM, Cisco, Intel, the London Stock Exchange, and many other organisations striving to build a cross-industry open standard for distributed ledgers. At the same time, the financial messaging company, Swift, introduced a blockchain-based service for business-to-business payments. Other organisations are also already offering services based on blockchain technology, such as Nasdaq, the stock exchange, and Ripple.
Blockchain is said to have the potential to revolutionise payments by making them faster, cheaper, and safer. However, it also raises a number of issues. What is needed to progress on blockchain and make it a reality? Is it even desirable to expand the use of blockchain to the financial industry? In other words, is blockchain a short-lived illusion, or does it have the potential to be a real game changer? To shed some light on the topic, the European Payments Council (EPC) gathered six experts from big name companies in the banking (ING), processing (Equens) and consulting (BCG) industries, as well as disruptive financial organisations (Fidor Bank, Bitpay) and a central bank (Banco de España) to attempt to answer this question.
This article summarises a lively debate that took place during the EPC’s last General Assembly meeting in December 2015. The views expressed in this article are solely those of the speakers and should not be attributed to their organisations, nor to the European Payments Council.***
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A very promising solution
All the speakers agreed that blockchain is a truly innovative technology that has real potential for the payments market. According to Kaj Burchardi from the BCG, the distributed ledger (which is a distributed record-keeping system where independent nodes hold the same version of the ledger record) presents some interesting value-creating opportunities. The group of experts articulated these as:
1) Cost reduction
The increased automation and reduction of manual processes enabled by blockchain reduces costs.
2) Faster processes
By removing third parties (i.e. automated clearing houses in the use case of payments), delays are reduced. “The expansion of the web 2.0 and social media substantially changes the global landscape. In 2020, it is probable that two billion people will be digital experts. The financial services industry needs to take advantage of this opportunity in order to meet consumers’ expectations for fast and efficient remittances. Technologies like blockchain give the impression that payments are faster. In this perspective, and as everybody is trying to improve payments, blockchain is already a game changer”, explained Michael Maier, from Fidor Bank.
3) Standard creation
Blockchain has the potential to create new protocols and norms, in coordination with regulators.
4) Authentication and security
“Blockchain protects your data and maximises security”, affirmed Marcel Roelants from Bitpay (a bitcoin payment service provider - PSP). With blockchain, each individual holds a unique key, composed of a private part (proof of ownership) to create new transactions, and a public part to verify transactions. If the owner of the transaction wishes to share the proof of ownership, they have to share the private key with other parties. Marcel Roelants carried on: “Blockchain can therefore validate transactions and proof-of-ownership, while enhancing security by reducing reliance on a central ledger.”
“With blockchain, as everyone has the complete copy of the ledger in the network, a hacker would have to hack 51 percent of the chain to change transaction entries”, explained Kaj Burchardi.
5) Creation of new products and channels
Blockchain could bypass existing marketplaces whilst leveraging novel distribution channels.
Use cases for blockchain are growing and are not limited to payments
These assets demonstrate that the use of blockchain could extend beyond payments. According to Mark Buitenhek from ING, “Blockchain has a huge potential. It could have a significant transformative effect in situations where complex information streams come together – such as in the financial sector (trade finance and securities, for instance). Anywhere in which there are complicated exchanges, numerous information flows, a large number of parties involved and a lack of trust amongst those parties, it can potentially simplify the incumbent business model, reduce costs and speed up performance.”
The most promising use is contracts recording. Blockchain can prove that a contract was agreed between two parties without having to reveal the details. This would be especially helpful in countries and situations suffering from institutional weaknesses, for example to record real-estate contracts.
However, blockchain would not be of much use in situations that are already highly standardised and working well, such as SEPA payments.
Blockchain raises a number of issues
Although blockchain won most of the votes during the debate, one dissonant voice was heard: Michael Salmony, from Equens. He acknowledged that blockchain is a fascinating technology and that any responsible organisation should look at it, but insisted that we must be careful with the hype around it. “Blockchain is currently a solution looking for a problem. Payments are also much more than just a ‘ledger’, thus the hope of sweeping away the whole payment system with a cryptographic algorithm does seem a bit optimistic. It should also be noted that distributed, safe, scalable, trusted solutions to ledgers (aka distributed databases) have been around for a long while. Blockchain still has to prove these attributes before a critical infrastructure like payments should be built on it. Most importantly, we should not start from a technology: we should look at the customers, see what problem they have, and then identify which technology could solve it.”
Most speakers, however, agreed that if blockchain is not yet a game changer, it definitely has the potential to become one. A number of questions must first be answered to allow it to fully reap its benefits.
1) Can blockchain handle our current transactions volume?
Blockchain is, for the moment, a small scale network. Its scalability to cope with, for example, the 35 billion transactions occurring in SEPA every year is not yet proven.
2) What about the hidden costs of blockchain?
Carlos Conesa, from Banco de España, warned against the hidden costs of bitcoin’s blockchain: “Though blockchain is a very innovative solution, some of its supposed advantages, such as disintermediation, cost reduction, and the fact that trust is no longer needed, are, at best, inexact.” For instance, the transactions’ verification is very energy-intensive: the energy consumption of the current bitcoin’s blockchain is higher than Google’s. On top of that, new intermediaries - requiring trust - appear as blockchain is developed, and converting bitcoins into sovereign currency can be very costly.
3) How private can, and should, the data be?
PSPs are highly bound to Know Your Customers (KYC) requirements. Some blockchain enthusiasts believe that blockchain could be a way to pool the KYC fulfilments among all PSPs: one PSP could fulfil the KYC requirements for a given customer, and trace them in the distributed ledger. Other PSPs wouldn’t, therefore, have to fulfil them as well. Whether compliance with KYC requirements would be easier with blockchain is however an open question. “How will we manage privacy and ensure transparency at the same time?” asked Marc Buitenhek from ING.
4) Is blockchain really safe?
Many security issues have appeared at the fringes of the system, for instance, in the wallets and exchanges. In addition, blockchain is still used today on anonymous markets that represent a threat to public safety.
5) How can we create standardisation?
Without cooperation among PSPs, there cannot be interoperable blockchains, and they cannot be used on a large scale. PSPs must therefore collaborate to progress on blockchain, in a manner that still needs to be defined.
6) What should the role of the regulators be?
To make blockchain a success for payments on a large scale, regulators should have their say in the status of blockchain transactions and the standards that they should use, such as ISO 20022. ING and other Dutch banks have, therefore, involved the Dutch National Bank in the research they are currently undertaking on the potential of blockchain. The Bank of England is also one of the most open-minded central banks on the topic, and acknowledged that the “distributed ledger technology represents a fundamental change in how payment systems could work”. Carlos Conesa recalled that “At first, many regulators showed disbelief, suspicion and neglect towards blockchain, sharing their concerns about security and anonymity, the lack of supervision and oversight, and even its potential impact on financial stability. An increasing number of central banks are now past this phase, and are analysing the potential of blockchain, having disassociated it from cryptocurrency”. Other speakers pointed out that blockchain could indeed offer central banks the possibility of monitoring money flows in real time, controlling the transactions more accurately, and acting in real time.
All opinions considered, isn’t the fact that banks are led to call their own practices into question the main asset of the blockchain hype? Stefan Dab from the BCG, who was moderating the debate, summed up an opinion shared by several speakers: “Blockchain is a game changer to the extent that it compels the banking industry to think differently and to consider major changes to improve its processes and services, even if in the end, blockchain proves not to be the new technology used.” Though the general sentiment on blockchain is positive - all speakers agreed that it cannot be ignored and is here to stay, even beyond the payment application - it is not necessarily considered to be the panacea in the long run. PSPs still need to take a closer look at it, in order to determine if it can be a real game changer. The banking industry should start with the customers’ needs, and then see how a technology, whether it is blockchain or another one that might supplant it, could then serve these needs.
Check out the EPC's infographic to learn more about how the blockchain works:
Related articles from the EPC newsletter:
How to Use Blockchain Technology to Develop Faster and Cheaper Inter-banking Infrastructures (EPC newsletter, April 2015)
Ripple: an Internet Protocol for Inter-bank Payments (EPC newsletter, April 2015)
Other articles in this issue
10.03.16 New developments on the SCT Inst payment scheme: the date of the public consultation, as well as the proposed initial maximum duration and amount of an SCT Inst transaction, are revealed! 10.03.16 The Crown Dependencies will be part of the SEPA schemes geographical scope as of 1 May 2016 10.03.16 The season of the EPC scheme rulebook consultations will start in April! 10.03.16 Cards Volume: be prepared for the next consultation 10.03.16 The EPC responds to the European Commission´s green paper on retail financial services 10.03.16 Kick-off of the ERPB working group on e-invoicing solutions related to retail payments 10.03.16 What you should know about the EPC´s response to the EBA´s discussion paper - EBA seeks preliminary input to Regulatory Technical Standards in support of PSD2 By Ruth Wandhöfer, Chair of the EPC Payments Security Support Group 10.03.16 Realising the value of Same Day ACH - Same Day ACH is a key part of the faster payments movement in the U.S. By Scott Lang, senior vice president, Association Services for NACHA 10.03.16 A step towards interoperable Person-to-Person mobile payment solutions in Europe - Three questions to Dariusz Mazurkiewicz, EPC facilitator of the stakeholders workshop on P2P mobile payments 10.03.16 The French payment landscape in a few key figures 10.03.16 If you missed them: a selection of interesting reports about payments
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