Blockchain is not a new technology; it has been available since the introduction of bitcoin in 2008. However, alternative applications in financial services have not yet achieved a critical mass of acceptance. There are some reasons for this, including the following.
- There is currently no legal framework that regulates the application of blockchain technology for processing financial transactions. What’s still missing is a stronger focus on governance principles and the network effect necessary to deliver the true benefit of blockchain-type or distributed ledger architectures.
- There is now a growing focus on security and other risk issues from regulators. It is expected that regulators will increasingly discuss and operate in collaboration with the industry to reach the best regulatory solutions for all parties involved. This will take time.
- There are now a number of private blockchain networks with tailor-made ledger solutions. An overall open source distributed ledger with common standards and protocols will still be required.
- Acceptance of a standard architecture for smart contract architecture will be necessary.
- Scalability will be difficult without a standardized approach to the technology.
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- Blockchain uses encrypted technology, which requires both a public and private key to process any transaction. While the encrypted technology itself is considered very secure, stringent policies and procedures will be needed when managing keys.
- To settle transactions, smart contracts must be connected to banking systems. This will require that blockchainbeintegrated into banking systems as well as their application program interfaces (APIs).
- The bitcoin blockchain process was designed to clear transactions within ten minutes. However, with every transaction needing to be recorded on the blockchain, the requirement of resources to process and store the information continuously increases.
- A large number of FinTech companies are working to solve the scalability issue. Options being discussed include increasing block sizes and scaled blockchains. A scaled blockchain would accelerate the process without sacrificing security and would be fast enough to power the internet of things (IoT). However, a solution to resolve the scalability issue has not yet been proven.
- As the number of blockchain users grows, it will become increasingly imperative that security is able to guarantee the privacy and integrity of information stored in the ledger.
If you are interested in learning more about blockchain, download our new guide titled “Getting Ahead with Blockchain in Financial Services.”