Gov.UK missing out on the real value? We’re shocked, we tell you…
Analysis It is a truth universally acknowledged that executives in the financial sector are capable of making the most exciting innovations boring, and in this respect their approach to the blockchain has been exemplary.
During 2008’s financial crash, a nine-page paper titled Bitcoin: A Peer-to-Peer Electronic Cash System [PDF] was published to the cryptography and policy mailing list at metzdowd.
The paper, attributed to Satoshi Nakamoto, offered cypherpunks and anarcho-capitalists a chance to realise their fantasy of a decentralised digital money; in practice, fiat currency backed not by government but by cryptography and collective consent.
You know this story: it was going to change the world, and then it wasn’t, and around the time bankers realised it wasn’t going to change anything they struck upon the notion of getting it to work for them – though with very little idea how.
According to Gartner’s hype-cycle, this sets blockchain technology near the peak of inflated expectations at the moment, ahead of 4D printing (What? – Ed) but behind virtual reality.
Speaking to The Register, fintech consulant Diana Biggs said it seemed “pretty evident that blockchain is very hyped at the moment” and noted a “marked change” from even two years ago, “when no financial institution or professional services firm would speak about it openly.”
A lot of the discussion (or hype) in the space is also quite surface level, outside of specialist circles, which I would attribute to a number of factors, including the early stage of the technology, the complexity and a lack of understanding [about the technology itself.]
Late last week, almost eight years after the Bitcoin paper’s publication, Rupert Scofield admitted to The Register over a breakfast briefing in Soho that he really didn’t understand what the blockchain was, nor its relationship to Bitcoin, but he believed it was important for fintech companies to look into it.
Scofield, the president of Finca International — a microfinance business which seeks to make small loans to businesses in the developing world — is not the first person to be as bewildered at what the business case for the blockchain is as he was excited one could be found.
Earlier this year, even Blighty’s Chief Scientist could be caught advocating that a GDS-built blockchain in the UK could help Her Majesty’s Government “collect taxes, deliver benefits, issue passports, record land registries, assure the supply chain of goods and generally ensure the integrity of government records and services.”
Sir Mark Walport’s 88-page report made little mention of how this would actually be of greater business value for the cited use-cases than a simple transactional database.
Even Scofield’s notion of using the blockchain for Finca’s “back room” would be obviously better handled by MySQL – something the CEO acknowledged. Yet the hype regarding the blockchain remains.
Earlier this year, London-based fintech company GovCoin Systems partnered with Barclays, RWE npower and University College London to trial blockchain tech for the Department for Work and Pensions (DWP).
This trial was subsequently slammed by the Open Data Institute, although it did so on privacy grounds.
Painfully slow and expensive? We must have it
A more pointed criticism, however, may be the unsuitability of the blockchain to store or process payments at all, because it is very slow and very expensive.
In recording every Bitcoin transaction that has ever occurred, forever, it is meeting the business necessity of establishing trust and user belief in that digital currency.
The blockchain prevents double-spending in digital currencies by ensuring that everyone knows where every Bitcoin is all of the time.
Transactions of Bitcoin take place by updating the blockchain so everyone knows that the Bitcoin in question is located somewhere new, with cryptographic hash values computed to validate its location.
While this novel method of preventing double-spending has been applauded, the protocol regarding the distribution of information along the blockchain also limits transactions to seven per second.
Compared with the thousands of transactions per second conducted by the payments company VISA, this is crippling quality for.
Suggestions for increasing the speed of Bitcoin transactions are regular subjects of debate in the Bitcoin community, but there may always be a critical limit to the speed of transactions as a product of the blockchain’s trust requirements.
As there is no need to require so much trust from the DWP or any other government department, these transaction limits may be improved — but when trust isn’t an issue, the business value of a distributed ledger also seems to evaporate.
A statement emailed to The Register after Friday’s breakfast briefing with Finca, and attributed to Scofield, accepted that “the financial sector has not properly come to terms with the opportunities that blockchain might present to businesses, and financial institutions need to put a lot more energy into bringing in experts who can make sense of the business case in a rational and sensible way.”
A blockchain advisor at Secure Trading, Mustafa Al-Bassam, who is also a doctoral researcher at UCL, told The Register that “sometimes industry receives investment because investors are excited by the buzzwords, despite the fact that blockchain might be incompatible with what they want”.
Al-Bassam added, “There is large amount of interesting innovation happening in Industry with blockchain and smart contract technology.
“For instance, some companies have been looking at smart contracts for financial instruments such as loans, or using a blockchain for inter-bank settlement.
These use cases could be more economically efficient than traditional approaches by removing administration costs or middlemen that take a fee.
“Apart from financial use cases of this technology, there are also use cases for internet security,” he said. “For example, the transparency property of distributed ledgers make it quite useful for certificate transparency to make rogue certificates easily detectable.”
Not that this has stopped the big corporations from having a go, with Microsoft offering a blockchain-as-a-service product on Azure, and IBM open-sourcing its own blockchain code earlier this year too.
Earlier this year, Gartner fellow Ray Valdes told The Register that 2016 was “the year of pointless blockchain projects.” He added that IBM and Microsoft’s blockchain-as-a-service efforts were confusing and missed the business-case yet again.
Centralised blockchain hubs defeated the trust problem that the blockchain was invented to solve.
Valdes said it was futile trying to pick winners in today’s saturated blockchain hypezone because the zone was at a stage similar to that of the web in 1995, back when the first wave of innovators started to build services and win millions of customers. Potential use-cases exist, as Al-Bassam noted, but they don’t seem to be on the market yet.
Biggs told The Register that her personal opinion was that “there is exciting potential for this technology, but perhaps not in the ways most people think.
And ultimately, new or old technology, it will all come down to business processes, policy and regulation to define what changes and benefits we will get out of this.”
She added: “In terms of a new underlying protocol, that will also depend on consensus and adoption, and to a much greater extent than in the early days of the internet as we are today more cognisant of the enormity of the potential impact of such technologies and thus more committed to trying to get it right.” ®