Why banks should stay well clear of blockchain

If the financial services industry is banking on blockchain as the basis for new service innovation, it will be sorely disappointed. Blockchain‘s design principles are completely at odds with those of the industry, and the technology is fraught with flaws that could be catastrophic for financial institutions.

I’ll come on to why in a moment. Clearly, there is a lot of hype and momentum around blockchain. WANdisco sees this first hand: We’re increasingly being approached by banks that think this is the kind of thing we do (it isn’t). And why are they interested? Because senior directors and investors have heard the buzz and concluded that this is something they need—that if they don’t seize the opportunity, they’ll miss out. They’re wrong. Banks need blockchain like a hole in the head.

But why do they think they want it? The original blockchain was developed as the mechanism underpinning bitcoin—enabling transactions in a peer-to-peer network to be validated without the need to pass through central settlement systems. Seeing wider potential for this, those promoting blockchain are now positioning the platforms more broadly as distributed public ledgers of transaction. So, banks are starting to look at blockchain for managing real-time transactions.

On paper, blockchain seems to have vast potential. But, in common with many other fintech fads, its current popularity owes more to speculation than genuine potential, and the chances of it realizing that apparent promise are slim.

That’s because the fundamental issues with blockchains aren’t going to go away. First, the whole proposition is built on distrust and on anonymity, shrouded in paranoia. And since blockchains are also highly hackable, disaster is frequently just round the corner. Last year, the DAO, a venture capital fund using a decentralized blockchain, lost more than $60 million worth of Ether digital currency—around a third of its value, when its code was breached. But such is the protection awarded to the parties involved in blockchain-based transactions; it’s impossible to trace the culprits and recover the lost amounts. It’s quite ludicrous.