Bundesbank President Weidmann says blockchain is no breakthrough technology for the financial industry. A closer look shows many financial industry players have had major successes deploying the technology, including central banks.
Is blockchain a “breakthrough” technology? The answer is No if you ask Jens Weidmann, President of the Bundesbank, which is the German central bank. According to Weidmann, blockchain technology is slow and expensive – the exact opposite of what blockchain proponents advertise as the core strengths of the technology.
Weidmann’s conclusion is based on a trial project which the central bank launched together with Deutsche Boerse in 2016. The goal was to use blockchain technology to transfer and settle securities and cash faster and at a lower cost. However, the blockchain solutions “did not fare better in every way,” says Weidmann.
“The process took a bit longer and resulted in relatively high computational costs. Similar experiences have been made elsewhere in the financial sector. Despite numerous tests of blockchain-based prototypes, a real breakthrough in application is missing so far,” he says.
Other central bankers don’t share Weidmann’s views; positive experiences in Canada and the Middle East
Weidman is right in saying that blockchain is not always successful in improving system efficiency. However, his sentiment that blockchain cannot lower costs or increase transaction speed is not universally shared, not in the financial sector, and not even among central bankers. Yves Mersch, a member of the European Central Bank’s executive board, says, “Some of the technology is worth exploring and could also be of interest to central banks.”
In the meantime, a growing number of central banks have begun exploring blockchain technology. In early May, the Bank of Canada and the Monetary Authority of Singapore have been collaborating in the use of Distributed Ledger Technology (DLT) and central bank digital currencies to make the cross-border payment process cheaper, faster, and safer. According to the official press release, the trial was successful.
Likewise, the central banks of the United Arab Emirates and Saudi Arabia are currently experimenting with a central bank cryptocurrency to settle cross-border remittances. Mubarak Rashed Al Mansouri, the governor of the UAE’s central bank, says a digital currency used between the banks would be “much more efficient.”
Private Sector is way ahead; Vanguard manages $1.3 trillion using blockchain technology
Weidmann’s blockchain criticism went beyond central bank systems, claiming “similar experiences have been made elsewhere in the financial sector.” And again, he is right in pointing out that some private banks have failed to deploy blockchain technology efficiently. However, there are more than enough positive examples to disprove the implied universality of his claim.
One of the more prominent examples is Vanguard’s blockchain project. The world’s largest provider of mutual funds is using a blockchain to manage the financial data for 25 percent of its assets under management.
In dollar figures, 25 percent of Vanguard’s total AuM amounts to around $1.3 trillion in assets. Hence, that’s way more than just a trial. The system has already been live for millions of Vanguard customers since February and according to the company, the implementation has been an overall success.
According to Warren Pennington, Head of Vanguard’s fintech strategies team, the company’s previous system required the manual syncing of data, with employees being forced to make updates manually. With blockchain, the process is streamlined and automatic.
There could be many reasons why the Bundesbank failed where others have been successful
The German central bank has not published much detail about its blockchain trial, making it difficult to identify the reasons for its failure. One possible reason could be that central banks in Europe are subject to strict privacy regulations and are highly interconnected with the European Central Bank. A lack of data access or system sovereignty might be a reason why the trial has failed.
Earlier this year, Pauline Kalfon, a cryptocurrency and blockchain executive for PwC France, warned that the French central bank was unlikely to use digital currencies anytime soon. Kalfon said such a decision would have to be initiated by the European Central Bank, indicating that national central banks are not in a position to independently conduct a blockchain project – or at least not if there are digital currencies involved.
Another reason might be a lack of expertise. Even in the private economy, which usually has more handsome budgets at hand, experienced blockchain developers are a rare breed. Vanguard’s Pennington says that while blockchain has overhauled his company’s system for the better, lack of familiarity with the technology was indeed a major roadblock during the development phase.
He says, “One of the challenges in a highly regulated industry is just lack of familiarity. That’s what takes time—letting people get familiar.” Could it be that the Bundesbank has simply not had the expertise to implement a blockchain project on this scale?
No doubt, blockchain is far from being a perfect technology and it won’t suit every alleged use case. But Weidman might be jumping to conclusions. Just because blockchain didn’t work for the Bundesbank, or let’s say, just because the Bundesbank couldn’t make blockchain work, that doesn’t mean the technology is completely useless. Instead, we should ask the question: Did Blockchain fail, or did the Bundesbank fail? And more importantly: Why?