Lack of a compelling business model.
The problem is that banks would like to use blockchain to make current systems more efficient. The trouble is that the current systems work truly well, and it turns out that the cost of switching over from the current system to a fresh system is far more than the money you would save. It doesn’t help that a lot of the money you would save would come in firing a lot of people that you need to implement the fresh system.
The big benefits from blockchain are likely to come from industries and use cases that don’t exist yet. The problem is that industries that don’t exist yet don’t have the budgets and the money to invest in fresh technology.
It doesn't scale. Bitcoin can accommodate approximately seven transactions per 2nd. The global financial system has many millions of transactions per 2nd.
This is partly because of the blocksize limit, which could be overcome if the economics of Bitcoin didn't force most mining to be done in a country whose internet uplink capacity is limited by government censorship. But more fundamentally its limited by the very idea of using computational cost to prevent fraud. Its exceptionally computationally expensive to mine a block and add it to the chain. That inherently boundaries the scale of the system,
There are many use cases being developed within the financial services arena using blockchain-based technology. The most effective and instant use case coming out in the marketplace presently relates to intentional transfers. For example I live in Sydney, Australia but have cash in the UK – it is quicker for me to fly to the UK (24 hours on a plane) go to my bank and fly back with the cash than it is within the current banking system, which takes three days to transfer cash, charges me $50 for the privilege and gives me an exchange rate Two.5% -4% below market rates. Blockchain-based solutions take around thirty -60 mins to clear with fees in the cents (plus exchange rate fees in and out of the cryptocurrency involved).
The challenges to adoption as I see it are threefold :
- scalability – for example the NYSE has around 1.4bn transactions a day. Blockchains because they have a consensus mechanism (where 51% of computers have to agree the block of data before it is agreed) means there is a delay inbetween the transaction happening and being agreed. Many companies are working on this scalability issue – most notable Digital Asset Holdings out of Fresh York (in tandem with the Australian Stock Exchange, amongst many investors) and many are looking at private blockchains to speed up the process as all the parties in the blockchain know each other already and can be trusted (unlike a public blockchain which has parties that do not know each other). Technically there is a long way to go but the cost savings associated with the middle offices processing the ownership and transfer of ownership (which is two days in Australia and longer in other jurisdictions) are potentially massive (check out the original fintech report – July two thousand fifteen by Banco Santander for enhanced explanation)
- Conservatism – the innovation divisions of the banks and other institutions are culturally so juxtaposed from those that are operational in nature. There is a quagmire of treacle that exists in inbetween these two – comprised compliance departments, risk departments, audit departments let alone quality assurance. Banks HAVE to get it right – failure means their clients lose confidence and the banks lose face, brand value and their business
- Business models – it is only where there are massive amounts of perceived ache – such as the international transfers example above – will the models be adopted quickly. There are slew of models outside of fintech that present clear models – where agony points exist- eg 20% of the world’s population has NO identity – leading to people trafficking and child prostitution. 67% of property has no formalised legal title. These models are all being worked on and will ultimately help financial services in helping refine the capability to take security and advance funds
There are many fine minds globally that are working on these cases and attempting to find adequate solutions. the technology is still very immature but it is getting better and better by the day.
Whilst there are some challenges in the short-term the power of the underlying technology has the potential to switch the form of global banking.
(Ultimately – the blockchain in plain English!)