Blockchain technologies have immense potential to transform payments, but they’re still not ready for prime time
It’s safe to say that few ideas have captivated the modern payments and financial services industries like blockchain. Since bitcoin officially arrived in 2008, the noise around the potential of distributed ledgers in general and blockchain has been incessant, particularly in the last two years. Blockchain evangelists – of which there are very many – routinely tell us about its potential to change everything in our world, from settlements and reconciliation to onboarding and know-your-customer (KYC) initiatives. And just in case we hadn’t got the message, some even claim that it’s bigger than the internet itself.
Why, then, have we seen very few commercial products in the eight years since bitcoin came to the world’s attention? To date, we’ve seen countless pilot projects, from nearly every financial organisation of any size: investment and retail banks, stock exchanges, credit card companies, payments processors and more. But very few of them have taken their proofs of concept to a marketable product. In many cases, these pilots have proved that the technology works but that there isn’t really a problem to solve, or a problem that businesses want to solve. In others, the limitations of current blockchain technology have proved too troublesome to build real products around. The situation’s bad enough that in February this year, Gartner estimated that 90% of blockchain projects launched in 2015 would fail within 18-24 months.
So, what’s really happening here? Let me put my cards on the table; I’m one of the blockchain evangelists I mentioned above. In past couple years, I’ve been using blockchain technology to solve real business problems at the Australian Securities Exchange. It’s entirely clear to me that it has the potential to revolutionise many kinds of business, from land and property registries to healthcare, insurance, trade finance, retail sales and much more; it really can be a single source of truth about transactions of any kind, regardless of industry. It’s also clear to me that blockchain has a huge potential role to play at Paysafe as we build out our platform for future growth and innovation. But before it can do any of those things, we need to look more closely at why progress has been so slow to date.
First, let’s think about the problems that blockchain is trying to solve. Distributed ledgers are nothing new – you can build private ledgers using decades-old database technology (as indeed thousands of organisations already do) without ever even mentioning the word ‘blockchain’. This is one reason why the back-office IT guys have been so sceptical about something that claims to resolve all the issues they’ve been dealing with for decades; in many cases, pilot projects have failed to provide real evidence that blockchain is a better way of solving problems that are already very well handled by other means. The technology may work, but it’s not actually solving the right problem.
That takes us to the second big issue: performance. You don’t need to spend much time in the blockchain world to discover that however smart the technology looks on paper, there are some things it’s still really not ready for yet. Commercial applications in investment banks and stock exchanges need to happen at a rate of thousands – or tens of thousands – per second. That’s perfectly possible with current database technology, however clumsy it might appear to be. Traditional blockchain, however, slows that down by orders of magnitude, to double digits per second. That may be fine in some non-time sensitive applications such as property or insurance. But it’s much less fine if you’re running a global ATM network or a remittance business, where you need everything to reconcile in real time. Like it or not, blockchain technology really isn’t ready for mainstream financial services applications yet. The good news is that there’s a lot of work being done to solve this problem.
Last, but by no means least, is the question of blockchain politics and regulation. We already live in a world where regulatory change is hard enough for organisations to rationalise – just look at forthcoming PSD2 regulations in Europe, for example, and the uncertainties it introduces even with known standards and technologies. Exactly how governments and organisations should introduce blockchain safely into the public landscape is still a matter of intense debate. Who enforces standards (and what are those standards, anyway?) How do we ensure that ledgers are interoperable? Who’s liable for errors or security breaches? Who manages disputes? What does anti-money laundering (AML) regulation look like in a blockchain-centric world? Those are merely the first in a long and challenging list of questions that remain to be answered before blockchain becomes a serious proposition in the financial services world.
Lest you think me too negative, let me reiterate my fundamental belief in blockchain principles. As I think about exactly what the Paysafe platform will look like in the future, it’s obvious to me that blockchain will play a key role in it; having a single source of truth at the heart of our brand portfolio will be incredibly important, and I believe that it will allow us to innovate in ways that we have barely begun to consider yet. My experiences in Australia have proved beyond any doubt that in the right context, and with the right technology, blockchain is a powerful force for change in an industry which still has some problems to solve. But I am mindful of something I once heard described as the Lycra Principle: just because you can do something, it doesn’t mean you have to. As Paysafe evolves and grows, blockchain will inevitably be a part of it; but only in the right place, at the right time.