Do Banks Have a Practical Use for the Blockchain? The Debate

February 9, 2016 11:00 AM

The continued development of blockchain technologies by banks and other commercial organizations for potential non-bitcoin uses has opened an intense public discussion. On BankThink and social media sites, techies and finance pros are debating whether financial intermediaries can and even should harness an innovation that was designed for a decentralized, trustless digital currency. Here is a sample of the debate.

Related: Blockchains and Shared Ledgers: A Banker's Guide (research report)

Different Chains for Different Pains

In a November BankThink post, Tim Swanson, the director of market research at R3 CEV, took issue with those who dismiss the practical appeal of blockchains controlled by private entities. "Some bitcoin enthusiasts assert that non-bitcoin blockchains are all the same and that 'permissioned' blockchains – or blockchains that gate transaction validation – are not much different than relational databases mixed with snake oil," Swanson wrote. "The problem with this broad generalization is that it does not distinguish between what each project, startup and effort in the overall space is trying to do. It lumps them all together without bothering to distinguish the potential customers and problem sets these projects are addressing."

Who Needs Intermediaries?

Others argue that banks and other traditional institutions tapping into blockchains runs counter to the entire concept, which was developed to allow value to move without central intermediaries. In a Feb. 4 BankThink post, economics professor Saifedean Ammous wrote, "[D]espite banks' attempts to test and use blockchain technology for their own commercial gain, it is outside the realm of possibility for the technology to serve any useful purpose for the intermediaries it was designed to replace. That is akin to burdening horses with engines in the name of technological innovation: the approach would only slow down the horse and alleviate none of its problems. Such a ridiculous notion will find no real world demand."

The Translucent Corporation

Ammous' op-ed sparked many comments, from both camps, including on the American Banker website, Twitter and two separate extended threads on Reddit. In response to Ammous' argument that blockchain won't make banks any nimbler, Ghela Boskovich of the software firm Zafin said (via Twitter): "But it will be more transparent." More precisely, shared ledgers may bring a form of "controlled transparency," according to a paper by Dave Birch, Richard Brown and Salome Parulava forthcoming in the Journal of Payments Strategy & Systems. "Why wait for quarterly filings to see how a public company is doing when you could go on the web at any time to see their sales ledger?" they wrote. "Why rely on management assurances of cost control when you can see how their purchase ledger is looking (without necessarily seeing what they're buying or who they are buying it from)?"

The Road Ahead

A BankThink reader disputed Ammous' horse-and-engine metaphor. "For one Blockchain is the foundation for Bitcoin, much like paved roads are the foundation for cars to drive on. The author combines them as they are one, not the case. Second if we keep with the foundational approach of a road and a car, as opposed to a horse and engine as he has, it will make more sense. Cars are continually improving, better designs improve safety, and efficiency. You will see the same thing happen when technologies utilize Blockchain to build a more efficient and safe way to transport money. This may not replace the intermediaries, but it may work alongside them. In sticking with the same comparison of the road and the car, we may be able to add more cars to the road though the use of Blockchain. This is what our friends in the Big Banks are working on."

It's Good to Be the King

Another Redditor argued that if anything, it's bitcoin that lacks agility, not centralized institutions: "Banks absolutely are already far more nimble than bitcoin ever will be. Centralized stuff almost always is." Similarly, Cecile Baird, the marketing chief at London startup Credits.Vision, said last month on Twitter that one advantage private blockchains have over bitcoin's distributed-consensus model is that "you don't need everyone under the sun to agree" on things.