ANZ's Christian Venter details nine reasons why banks aren’t using blockchain

ANZ's Christian Venter details nine reasons why banks aren’t using blockchain

Christian Venter*

Despite the simplicity and popularity of blockchain technology, the traditional financial services sector has been slow and even reluctant to put their toe in the water. 

The reality is the application of the technology behind blockchain is very new. It’s doubtful you will see significant adoption in mainstream banking within the next five years. 

Still, blockchain is and will be a revolutionary technology. Any financial institution (or anyone else for that matter) in the trust business ignores blockchain at their own peril. It’s why most of the big banks are experimenting with it right now and why picking a standard at this point in time is not necessary. 

What is important is solving the limitations the bitcoin implementation of blockchain has in order to allow mainstream adoption in Banking. ANZ is currently working on proof of concepts and with organisation like Hyperledger to design simpler, more effective and lower risk solutions. 

Below are nine key reasons why blockchain is taking so long to be adopted by the mainstream. 

• The banking industry is highly regulated and banks are naturally very cautious. Most of the big banks are piloting the technology and cautiously dipping their toes into the water. 

• Scalability. Visa today handles about 2000 transactions every second. Blockchain for bitcoin is currently limited to four to seven transactions per second because the protocols in bitcoin limit the size of transactions blocks to 1mb. Obviously a major limitation, although some of those organisations mentioned above are working on solutions to scale blockchain. Bitshare, for example, claims to be able to process 100,000 TPS. 

• Security. While extremely secure, the technology implementation of something like bitcoin is unregulated. A group of individuals with gigantic computing power could theoretically establish their own chains as a definitive version and hijack the bitcoin block chain. 

• Bitcoin implementation is decentralised and unregulated. This creates mistrust and if things go wrong. Who do you sue? How do you implement compliance, anti-money laundering and know-your-customer regulations? 

• The implementation and use of blockchain solutions are very new. There are also very few people who really understand it and what its capabilities and limitations really are.

• For blockchain technology to be effective it relies on cooperation and co-ordination. How likely is it banks all over the world competing for the same customers with similar products will choose to truly co-operate? One could argue they already have with SWIFT but this requires a standard for them to agree on and its early days for this to occur. 

• Human nature. The saying from the 1980’s, “No one ever got fired for buying IBM”, still applies, especially in highly risk-averse regulated industries like banking. 

Adopting blockchain-based payment processing will require leaps of faith and risk sadly very few will undertake at large scale until it is forced on them. 

Let’s say you a CIO and decide to take this leap of faith, who do you pick to take it with? Ripple, R3CEV, Bankchain, TRUST, Sidechains, Bitshare, HyperLedger, SWIFT GPII ? It’s early days and too soon to pick a winner. Beta or VHS ? USB3 vs Firewire vs Thunderbolt ? It may well be too soon to decide. 

• Regulation could conceivably be part of the solution. The creation of a central governing body to regulate the financial services blockchain and its membership could help, but if history holds true, by the time this happens some new disruptive technology will probably be in place. 

• While complex and costly, the current banking infrastructure that securely and safely transfers our money works very well. Unwinding this is unlikely to make it to the top of too many banks CEOs to-do lists in the short- to medium-term. 

The world’s top 1000 banks earned over $US940 billion last year in profits. There are estimates floating about from Santander that banks can save $US20 billion if they used blockchain technology. 

Given cost complexity and the time required to roll it out, something like blockchain globally on the scale of these figures puts the likelihood into perspective. 

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This article first appeared on ANZ's BlueNotes website and is used here with permission. It is an excerpt of the BlueNotes longread “Everything you’ll ever need to know about blockhain”. Click here to read the full story.

*Christian Venter is GM Consumer Digital Technology at ANZ.

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8 Comments

I wonder if one of the real reasons is that fractional reserve banking will be a lot more difficult.

After closely following bitcoin for years the primary use is for criminal activity. Mostly for scamming gullible victims. Bitcoiners are usually very gullible, the fact that they consider the blockchain as a revolutionary thing. The blockchain is a public ledger nothing more.

Bitcoin is the most unwieldy aspergers driven thing you could imagine. Most hope the price of bitcoins will go through the roof by them being adopted. Most bitcoiners are trying to hoard bitcoins thinking that they are deflationary when they are inflationary, there's more made every 10 minutes.

Bitcoin is vulnerable to a number of attacks, so of which have been demonstrated this year. If people did their research they'd find some of the loudest advocates of bitcoin on the bitcointalk forum live in trailer parks in the US. Others are just really bad at mathematics and don't understand that the bitcoins they try to mine cost a lot more in electricity than their value.

Before someone goes on a conspiracy rant at me I have mined bitcoins and am acutely aware of the technical issues. I also used to follow all the resultant court cases including the DEA agent who extorted bitcoins from Silk Road (the Tor based drug trading platform).

It is tiresome when people spout bitcoin propaganda and have no understanding of bitcoins. Especially those that think they are private, the bitcoin wallets on the public ledger have been traced in court cases.

Look at any bitcoin related enterprise with suspicion and don't support bitcoin as that gives support to organised crime, drug trade, child pornography and the very long list of scams.

Also if you do have bitcoins think carefully on spending them. There are no chargebacks so if you send someone bitcoins it's a one way transaction that's irreversible.

I hear what you say and, having admired the notion but not dealt in bitcoin at all, It is mainly because of the points you make.
However, I do see that with refinements a crypto currency such as bitcoin may soon sweep in to blow the dinosaurs out for most of the reasons described in the article. Let's be frank, financial institutions have secure and insular systems largely to prevent those outside seeing in at their activities. They will not be inclined to join up if it means their handiwork, while secure, may be visible.

Not a single mention of RSCoin. I wonder why?
The proto-currency known as RSCoin has vastly greater scope than Bitcoin

RSCoin would be a tool of state control, allowing the central bank to keep a tight grip on the money supply and respond to crises. It would erode the exorbitant privilege of commercial banks of creating money out of thin air under a fractional reserve financial system.

This article is an example of banks running scared. Terrified in fact.

Google RSCoin

Dr Danezis said a national pilot project could be up and running within eighteen months if a decision were made to launch such a scheme.

"Let’s say you a CIO and decide to take this leap of faith, who do you pick to take it with? Ripple, R3CEV, Bankchain, TRUST, Sidechains, Bitshare, HyperLedger, SWIFT GPII ? It’s early days and too soon to pick a winner."

I'm picking it. It's Ethereum, a decentralised platform that runs smart contracts and can handle 1.4m transactions per day - with plans to increase.

A recent DAO launch (Decentralised Autonomous Organisation) based on the protocol, destined to become an investment fund run 'by the people', has raised $40m in the last two weeks, and the token generation is not even halfway through.

Waiting 5 years for significant adoption of the blockchain by any financial organisation seems risky; things are moving fast.

Further info - BBC explains ethereum: https://www.youtube.com/watch?v=0X33lgMbvdI
NZ conference (no I'm not associated with this in any way): http://bravenewcoin.com/news/ethereum-new-zealand-conference-to-expand-b...

Geegs - Exactly and it is a great pity this was taken off the front page so quickly.
Interest.co.nz should do more work on Etherium because this is going to have dramatic effects on the financial system. And, i believe, much sooner than people realize.
Did you see my comment above about the RSCoin?

Hi Mike B, yes I did read it, though I don't know a lot about RSCoin I think it's likely there will be many blockchains operating together by the time things fall together. Does RSCoin have something to do with Rootstock?

Did you see this this morning: http://www.radionz.co.nz/national/programmes/thiswayup/audio/201800722/'smart-contracts'-and-the-blockchain
A featured article on RNZ!