Is Stupid Money Chasing Blockchain?

© Can Stock Photo Inc. / ElnurThere seems to be a profound conundrum facing blockchain and its implications for financial services.

While it is true that blockchain seems to have the potential to “transform” financial services, it also faces steep challenges. It begs the question: is the at least $250 million invested in blockchain so far this year wrongheaded?

It is clear that not just startups, but traditional financial services vendors are putting big dollars into blockchain development. The latest to tout its blockchain efforts is ACI, which told CoinDesk today that is working on a blockchain-for-central-banks solution “constructed on a five-node network that runs on servers in Omaha, Nebraska, and Norcross, Ga.” According to ACI, the company “has built a blockchain proof-of-concept specifically designed to simulate how a central bank and four financial institutions could transact on a blockchain.”

It can’t be cheap to build a blockchain for central banks. That’s particularly the case because the transaction performance of such a network has to be astoundingly robust, not to mention “absolutely bullet proof.” Here’s how Coindesk describes it:

However, [Chief Architect Roger Oliphant ] believes ACI’s customers will demand the technology handle at least 2,000 transactions per second, a figure that’s a long way from the results it was able to achieve today. In its proof-of-concept, ACI was able to clear and settle transactions every five-to-seven seconds, or an order of magnitude faster than the one-to-three days required by its current system.

But the same transaction timeframe wasn’t enough for payments. Consensus computations, he said, are too slow when compared to the millisecond range its existing system achieves.

One transaction every five-to-seven seconds isn’t even close to 2,000 transactions per second, a fact that Oliphant himself has readily admitted. Overcoming this technical hurdle will not come easily or cheaply. Our sister accelerator, INV Fintech, has seen applications from some startups trying to overcome this performance challenge, which is not just an issue of developing an efficient consensus algorithm. Let me put it this way: we’re not likely to admit those startups into the fall class of INV Fintech.

And then there is the regulatory issue.

In a jarring opinion piece in the FT today, Oliver Bussman, the former group chief information officer of UBS, threw the dankest of towels on the likelihood of quick regulatory adoption of blockchain technology, even as Bussman fessed up to the fact that as CIO, he pushed UBS into blockchain development early.

Regulators will want to be sure that large-scale platforms are absolutely bullet proof before they are released into the wild. And, if platforms want to reach across borders, they will need regulatory sign-off — and certainty — from all jurisdictions involved. This will not happen overnight.

It is fair to say that “overnight” in the warped world of financial regulators is something on the order of two to four years.

Bussman’s conclusion:

[A]s an adviser to banks and fintech companies today, I am cautious. My experience tells me it may be a while before we see large-scale adoption in the financial industry.

It would seem that this Orthrus of a problem for blockchain will remain for some time. What is striking is the seemingly continuing disregard for these challenges exhibited by even usually conservative traditional financial technology companies. ACI did not become a $2.1 billion market cap company by chasing bad ideas with good money. Yes, the rewards are tantalizingly monstrous: a piece of even central bank transaction, for example. But, truly, is it realistic to expect the world’s central banks to give ACI (or any number of private tech companies) a cut of their trading action? And we have not even touched on the Ethereum DAO debacle. Widespread blockchain adoption of any note within any reasonable, near-term timeframe seems far-fetched to me, even if the profound technology obstacles can be overcome.

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