Bad News from the Cryptocurrency World

Finance's blockchain romance is over as major venues see breaches

Joanna Wright, reporter, Inside Reference Data

The backlash has well and truly begun as Ethereum and bitcoin show vulnerabilities, stirring firms to question security and governance of decentralized systems.

Back in June, transactions on the Ethereum blockchain had to be effectively rolled back.

This so-called "hard fork" was implemented in order to recover millions of dollars' worth of the cyptocurrency Ether that had been stolen from a fund that lives on the blockchain, the decentralized autonomous organization (DAO).

And then, in early August, came news that bitcoin exchange Bitfinex had been hacked to the tune of millions.

Not all that long ago, these exploits and the ensuing debates would have played out in tiny online communities of nerds and made scarcely a ripple in the mainstream media. But finance has recently been having something of a love affair with blockchain, and so banks, market infrastructure providers and journalists took note of the news.

With so few use cases for blockchain yet adequately demonstrated, finance is looking anxiously to the cryptocurrency world and to ventures such as Ethereum for intelligence on the future of blockchain. Despite its rebranding in financial services as "distributed ledger technology" (DLT)—doesn't the finance world just love an acronym?—cryptocurrencies are where blockchain still truly shines.

And the news that's emerging lately is not encouraging. Banks are expressing fundamental questions about data security on blockchains and how governance can function in decentralized systems. The news of the Bitfinex hack has come at just the wrong moment for proponents of DLT.

The hype around blockchain—sorry, DLT—happened probably because firms are looking to leapfrog the expensive and quixotic task of fixing legacy systems, and because they are tired of the same old post-trade inefficiencies.

But DLT, as I have said before, doesn't do anything that centralized databases don't, once you take away the cryptocurrency element. There's interesting work being done, in the realm of legal contracts, for example, and a lot of money invested in DLT, but it will probably take years to prove its efficacy—and only then if it isn't mitigated by a lack of standardization. Apparently it may not be as cheap as advertised, either. An analyst tells me that the difficulty involved in migrating from centralized databases to DLT is about the same as that of migrating from relational to NoSQL databases.

I suspect the backlash against blockchain has well and truly begun.

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