It’s fair to say that blockchain technology has taken the world somewhat by surprise. Some of the slowest to react so far have been the institutions which potentially have the most to gain from its implementation; the banks. The reason our legacy financial institutions have been a little slow to the blockchain party may have something to with the fact that they also have the most lose should distributed ledger technology proliferate exponentially. So, what does blockchain technology have to offer finance?
Last week, ING, the multinational banking behemoth, hosted a debate at its Moorgate headquarters to discuss just this. The debate took as its centre piece a report by the Centre for Economic Policy Research (CEPR) entitled, The Impact of Blockchain Technology on Finance: A Catalyst for Change.
Introduced by ING’s Chief Economist, Mark Cliffe, the subject matter proved a catalyst for lively debate if nothing else. No one can accuse this particular bank of burying its head in the sand when it comes to disruptive new innovations. As Cliffe noted in his opening remarks;
“It’s clear that blockchain distributed ledger technology could have a transformative effect not just on finance but on all sectors of the economy” and for this reason ING are following developments with, “intense interest.”
Panelists on the night were compered by the Financial Times’ very own John Plender who put less technically minded members of the audience at ease by admitting his relative ignorance on the subject, dead-panning that, “I have to give you the necessary health warning, I’m very inexpert on this, happily though the panel is highly expert.”
The expert panel comprised of Herve Francois, Simon Johnson and Tim Jones, and the disparate viewpoints they were able to offer not only made the evening a fascinating battle of wits but also served to illustrate how fundamentally divided the sector is on even the most fundamental concepts of blockchain technology.
Simon Johnson, a Professor of Entrepreneurship at the MIT Sloan School of Management, opened proceedings with a defence of permissioned distributed ledger technology, a form of blockchain technology which functions as a private network overseen by internal monitors. The system stands in direct opposition to permissionless blockchain technology which is utilised in all of the most well–known cryptocurrencies like Bitcoin and Ethereum.
The verification of transactions on permissionless blockchains is achieved via the consensus of more than half of all the computers on the network (known as nodes). Such transactions are called trustless as they don’t require the oversight of any trusted-third parties, like banks. Whilst Johnson listed security as the main reason for his preference towards permissioned blockchains, the fact that the implementation of permissionless blockchains in a legacy banking environment would be tantamount to harakiri may have gone some way to inform his opinion as well.
Next up was Herve Francois, the Blockchain Initiative Lead at ING Netherlands, who offered a technical overview of what blockchain technology could offer finance, citing examples under development or being tested at ING. As well as listing the benefits of blockchains in their capacity to manage supply chains, facilitate payment and increasing accountability, he also highlighted what he called “issues or hurdles” to their implementation. These include, according to Francois, scalability, slow transaction speeds and liability issues surrounding the execution of automated smart contracts.
Whilst Francois and Johnson offered different approaches, their general outlook on the potential of applied blockchain seemed to chime mostly in unison. To play Devil’s advocate, up stepped Tim Jones of Tibado who threw himself into the task of forming a counterpoint with admirable zeal.
Jones was quick to pour cold water on the hopes and aspirations of blockchain exponents and cryptocurrency enthusiasts, he even went as far to claim that dissenting voices like his had been all but silenced in recent years. He said;
“It has been completely impossible to get a fair hearing over the last four years, the emotional excitement around distributed ledgers means that if you’re very old, with grey hair, a loud tie and you talk about a new central ledger design you’re clearly ready for retirement. Just get out of here, you’re not down in the hood, you haven’t got a beard, and frankly it’s time to exit stage left!”
Whilst it could be argued that Jones’ rhetoric was equally as emotional as anything offered by the other side, he did make some logical criticisms of both permissioned and permissionless blockchain utility. Of permissionless ledgers he stated;
“The blockchain makes a promise that it can’t keep, the promise is that somehow there’s a distributed network of trust with nobody in the middle that needs to be trusted, and that just isn’t true”
Making reference to Bitcoin’s illusive creator Satoshi Nakamoto, Jones argued that the notion of a trustless network was essentially illusory;
“Even with a permissionless structure like Bitcoin, you’re effectively trusting Satoshi”
Jones was perhaps even more withering in his criticism of permissioned ledgers, which he sees as some sort of muddled compromise. Of private ledgers whose transactions are overseen by appointed nodes or network guardians he said;
“Unfortunately, you now find yourself having to trust the permissions manager in a permissioned blockchain because somebody is in charge again”
After the floor was opened to audience questions, the evening became a slightly rudderless meander through, not only the issues surrounding blockchain technology and its impact on financial services, but also banking regulation, collateralisation and the 2008 global economic crisis. Even as a beard-sporting hood dweller I found it rather hard to keep up! The one thing I was able to take away from this breakneck tour through the blockchain minefield is that consensus on the technology’s utility in the financial sector appears thin on the ground, rather ironically so given the subject matter.