Banks should abandon their blockchain fantasies

Crypto marketing shows a predictable shift during the bear markets towards the tough of payments and business applications, replacing the speculative euphoria of the bull market. During this more sober period, there is an opportunity to look more closely at the claims about this technology.

For more than a decade, blockchain has been touted as a game-changing revolution in how companies manage and unify data globally. Consultants have pitched the technology as a means of streamlining supply chains, upgrading payment infrastructure, accelerating clearing systems and making global trade more efficient and less dependent on third parties. However, the reality has fallen far short of the hype.

Much of the current rhetoric surrounding this kind of transformation uses the term “tokenization” as an umbrella to describe a simple premise: representing real-world assets in digital form and then using that as the source of truth about ownership. From the first principle, this seems like a completely desirable and natural thing to do.

Financial infrastructure across Europe and America is heavily dependent on legacy IT systems, typically written in the early 1980s, which are both fragile and expensive to maintain in perpetuity. Upgrades of critical systems such as core banking infrastructure and settlement systems have often been approached with a “kick the can down the road” philosophy.

Replacing this class of critical infrastructure is often difficult because the cost-benefit ratio of doing so is impossible, or the systems they support cannot be allowed to fail in any way because they are critical to markets.

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And that’s where blockchain came in with a deceptively plausible solution to a legitimate concern. What if all these legacy data silos and the institutional glue meant to reconcile data between counterparties could be replaced with modern, always-on, real-time reconciliation systems that centralized data in a shared database? That would be brilliant.

But just because you ask the right question doesn’t mean you have the right answer, and that’s where we find ourselves with blockchain.

In a nutshell, blockchain is a digital ledger that stores data in a distributed network of computers, where each computer has a copy of the entire ledger. Data is stored in a series of blocks that are linked together in chronological order, forming a chain. This creates an immutable record of transactions, meaning that once data is recorded on the blockchain, it cannot be changed or deleted.

The decentralized nature of the network makes it both globally publicly accessible and censorship-resistant, meaning that no single entity can control or manipulate the data stored on the blockchain. This idea of ​​censorship-resistant databases is borne out of the philosophy of cryptoassets, which naturally arises from the ambiguous legal status of non-government money or unregistered securities offerings.

The problems with crypto are not the same problems with corporate IT. The need for a completely public and censorship-resistant database is both unnatural and problematic for most businesses. Companies naturally don’t want to expose their internal business operations to the world, and the blockchain that protects their data silos from censorship by outside actors has a far more natural solution – simply not exposing those data silos to the public in the first place.

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On the back of these irreconcilable contradictions in the use of public blockchains for enterprise applications, many consultants have pitched their clients on so-called private blockchains. The premise is simple: remove the unnecessary parts of blockchain technology and make them more usable for enterprise applications. But when the crypto-like aspects of blockchain are removed, it is unclear what is left that is meaningfully different from a traditional database.

In fact, the best-selling database solutions from companies like IBM, Oracle and Microsoft have had all the selling points of private blockchains – immutability and automatic reconciliation – for more than 40 years.

The so-called tokenization projects of banks such as JPMorgan, Blackrock and Goldman Sachs built on top of private blockchains to perform intraday repo transactions or bond settlements are quite real, but the use of the word “blockchain” to describe any of this is pure innovation theater. Tokenization is just mundane “digitization” wrapped in crypto language. And most securities markets have already been digitized since the 1980s.

Innovation theater is not inherently problematic; companies do it every day. The additional problem, however, is that this process of institutions promoting “blockchain the underlying technology” often implicitly involves giving an aura of legitimacy to crypto-investment in public perception.

“Goldman Sachs enters crypto” is far from the reality of “Goldman Sachs sells digital bonds to other banks on a private database”.

Blockchain technology is neither particularly innovative nor useful and has a terrible track record of success in the IT industry. At best, it’s simply a buzzword describing mundane technologies that have been around for decades. At worst, it is a solution in search of a problem, a form of technical fantasy that falsely promises to alchemize human trust through technology and is symptomatic of the irrational exuberance and magical thinking that arises from cryptomania.

Diehl was on the UN’s latest list of anti-crypto influencers. Catch up here.