The blockchain conundrum
Darryl Proctor, Product Director—Payments at Temenos addresses common concerns surrounding the applicability of blockchain technology.
How would you describe the reception of blockchain technology in the region?
Temenos are having a lot of blockchain related conversations with banks within the region, GCC and beyond who are clearly recognising the potential for this technology. This is further reinforced with the UAE government already having started to experiment with the potential uses of blockchain in the public and private sectors. In particular, blockchain offers potential for IslamTech, as Islamic financial instruments have different degrees of compliance with Shari'ah Law, dependent upon the Imams who authorise the product. In some countries, their interpretations of usury and leverage are different to others, and a shared ledger would be a great way of bringing transparency the market.
From a general perspective, the National Bank of Abu Dhabi becoming the first bank in MENA to introduce real time, cross-border payments on blockchain with our partner Ripple was a major step for the region but they aren’t the only bank to be investing in this technology. In January, the Dubai International Financial Centre (DIFC) and management consultancy Accenture launched FinTech Hive, the region’s first fintech accelerator and Emirates NBD and Mashreqbank will be the first local financial institutions to join the accelerator programme, along with international bank HSBC.
Elsewhere within the region, Bahrain is in talks with Singapore’s central bank to deploy a pilot blockchain project to establish a fintech ecosystem and regulatory framework to become a hub in the region. With the Central Bank of the UAE having recently clarified regulations stating they do not outlaw virtual currencies such as BitCoin and the many fintech hubs (including the Global Blockchain Council by the Dubai Museum of the Future Foundation), there is a lot of support for banks wanting to utilise blockchain and as a result many are championing the technology.
What challenges would a bank face in implementing blockchain?
Blockchain is basically real-time. In terms of payments, many of the old systems are batch based. There has to be a technology change, there has to be a transformation from these legacy systems, these monolithic blocks of technology, into more modern open architecture. Architecture that can deal with real-time and operate 24/7. And of course, all banks will need to have systems to manage real-time payments so the need is twofold. However, we must remember that blockchain technology is a layer outside of a bank that they must interact with. Banks must have agile systems to interact with blockchain services.
Another, and potentially the most important inhibitor, is that of collaboration. For a blockchain to work, all the parties to the said transaction, need to be blockchain enabled. It’s a model that fosters collaboration, but with the expense of processing transactions it’s hard to say, unless it becomes ubiquitous and cheaper, that it will be readily adopted by the general public
Blockchain advocates affirm that the technology is safe. In terms of cybersecurity, is it full proof?
This is an interesting debate. Security in general doesn’t appear to be a major concern for banks—only three per cent of banks stating security as a factor in ‘preventing (banks) from starting (the blockchain) journey’, according to the Deloitte EFMA KBC Blockchain Survey conducted in April 2016.
However, we have seen hacks from inadequate solutions and related particularly to cryptocurrencies. There is for example, vulnerability in having a chain with very few nodes. This makes for an easy target for someone to attack the chain as there were no other security mechanisms in place. When bitcoin began with just a handful of nodes their tokens had the value of a fraction of cents, so it was economically unfeasible to attack them.
This wasn’t a major issue initially, but, as the network grew the value of bitcoins grew. While they are at a decent value today their network is at a size that makes an attack economically unfeasible—you’d simple burn more money on electricity than the bitcoins that you can steal are worth and at the same times the bitcoins you’ve stolen would become less valuable as the network has to assume stolen tokens. As long as this equilibrium of value and potential to hack remains intact the risk of an attack on blockchain technology and particularly cryptocurrencies employing POW algorithm, is low, but not impossible to comprehend
The implementation of blockchain in financial institutions would definitely reduce costs. Will it completely eliminate the human element in transactions?
The essence of blockchain technology is that it has been able to remove the need to trust humans, to store, record or even trade anything of value or importance. And when trust is placed in computer verifiable mathematical equations: a) it becomes very easy to scale these systems; and b) the cost of establishing and proving trust goes down, i.e. creating trustworthy system becomes very affordable. So ultimately, the human element of transactions is set to greatly reduce, however, elimination is impossible to claim.
For example, let’s look at immutability. Although immutability of blockchains is a pivotal feature for security guarantees, this very same property can represent a hurdle to the future of this innovative technology. This is because external events can occasionally annul existing smart contracts and transactions already recorded on the blockchain or data stored on the blockchain can be illegal to distribute, for example, bitcoin’s blockchain is already storing leaked cryptographic keys and wikileaks files. Therefore occasionally human interaction may be required.
We shouldn’t forget the end client for blockchain, ultimately that is a person in control or in demand of a service that the blockchain needs to fulfil. So ultimately humans will always be part of the solution
Looking at a worst case scenario—what is the worst thing that can happen to a financial institution when using the blockchain technology?
We are seeing a lot of partnerships between banks and fintechs such as cryptorail providers. This is really positive but what can be overlooked is that the core banking system must be considered. To see this technology embraced we need to complete the network with parties at both ends integrated to the common platform. There is a great danger that unless solutions are fully tested and consider the end to end process then the benefit of blockchain will be limited and the technology could fall down before it has even started.
To address this it is important that a bank’s core banking system provider is ready for blockchain as well, that they have a strong partnership with a broad spectrum of fintechs, giving the breadth to allow banks to develop along the blockchain journey as well as benefiting from the economies of scale that providers with multiple clients can offer banks.