Golden Copy: The Blockchain is Just a Database

Vitalik Buterin looked nervous as he faced a sea of suits alongside representatives from big banks on the stage at a recent Swift Business Forum in London.

Or perhaps Buterin wasn't nervous at all; perhaps it was just the effect of his extreme youth. At a very fresh-faced 22, the Ethereum founder represented that day a potentially disruptive technology that is currently fascinating and confounding banks, who are trying out the concept of blockchain in the manner of an old man wearing a baseball hat backwards.

The panel session, on the potential for blockchain in financial services, was standing room only, as such sessions often are these days.

Buterin discovered Bitcoin in his teens and went on to develop Ethereum, a public blockchain. Early enthusiasts of the cryptocurrency, many of whom have a libertarian streak, believed it could free the markets from the despotism of central banking and governments. Perhaps it has struck him that the technology underpinning Bitcoin has been divorced from the currency and co-opted by the very establishment many hoped it would replace.

There are all manner of financial industry initiatives and consortia dedicated to finding out where and how blockchain can disrupt everything from collateral management to payments to master data management. It's early days, and no-one can say for certain at this stage precisely how it will be used—and in some cases, blockchain seems to be a shiny new tool in search of a problem.

That's not to say blockchain doesn't have disruptive potential, only that banks should temper their excitement, or be faced with the consequences of rash choices down the line. Vendors say banks are coming to them with use cases where blockchain just isn't applicable; implementing blockchain where other, better understood technologies would do just as well, or better, could ultimately end up costing financial institutions more.

There are a number of concepts you'll hear spoken about when it comes to blockchain, and a fundamental one is ‘trustlessness': in a blockchain, parties engage in transactions with surety. Take that transactional element away and what you have is just a database, one that isn't much good at processing or storing data. A blockchain is a database distributed across nodes and each of these nodes processes all the data—it's not all that efficient. 

Another start-up is apparently looking into blockchains for corporate actions. I can see why this is a seductive idea, as this is a pain point for so many institutions. But, as one analyst has said, corporate actions are one of the most complex and non-standard areas in capital markets. Standardization has to happen before blockchain happens, and not just in corporate actions. A blockchain that isn't industry-wide, that isn't banks mutualizing common infrastructure—as Blythe Masters put it at the Swift event—is pointless.

As Buterin said on his panel, blockchain technology continues to evolve all the time. So it's tough to make any calls about the future. But for the moment, it seems many organizations would be better off improving and consolidating their existing systems, investing in breaking down siloes and automating manual and legacy processes. It's not sexy, but it's certain.