Every now and then you run into a news story about some financial sector company using blockchain technology. A headline from this morning proclaims: Mastercard Hints at Plans for Blockchain Settlement System  In fact there’s a glut of financial sector blockchain activity, but should there be?

As early as March 2016, that’s over a year ago – a decade in Bitcoin years – a global banking consortium completed a series on tests of blockchain technologies, hoping to divine how the blockchain could be used in global financial markets. According to an IBM survey later in 2016, 15 percent of the 200 top global banks were intending to roll out full-scale, commercial blockchain products in 2017, and 65 percent of these banks expected to have blockchain projects in production in three years. Personally, I doubt if many of these trees will bear fruit. To understand why, we need first to understand what a blockchain is.

What Is A Blockchain?

A blockchain is a continuously growing list of records that are batched up into blocks. The blocks are chained together and secured using cryptography. Each block contains: a hash pointer that links to a previous block, a timestamp and all the transaction records. The virtue of this arrangement is that once a block is added to the blockchain it is immutable. It “cannot be changed.” If the data stored in unencrypted then anyone can view it. If the blockchain records are financial transactions, such as the buying and selling of a cryptocurrency, the blockchain is usually described as a ledger.

The obvious question to ask is: why would any bank have any interest in this. Banks, after all, have been keeping ledgers for decades, in files and in databases. So, yes, they could if the mood took them, store those ledgers as blockchains. And it wouldn’t change a thing.

A Blockchain Business

There’s a big difference between the blockchain as a data structure and the distributed ledger technology that is employed in blockchain-based businesses. The difference is in the word “distributed.” While blockchains are designed to be immutable, if there is only one blockchain, it can easily be compromised. Just change the record you wish to change and then recalculate all the blocks after the point where you made the change. To prevent this obvious hack, cryptocurrencies implement a distributed system with multiple copies of the blockchain on multiple different servers owned by many different businesses or individuals, each one of which is kept up-to-date independently. The blockchain is thus maintained by a distributed consensus. While it maybe possible to compromise a single blockchain, it is not possible to compromise a whole network of them simultaneously.

In strict technology terms, this is a very expensive approach to keeping a ledger. Instead of having a single database, you have many (perhaps even thousands) of distributed databases. Instead of a few servers, you have thousands of servers and you also need a reasonably fast network connecting it all. And, to cap it all, it is slower.

So why do it?

The Genius of the Blockchain Idea

What is awesomely smart about the distributed ledger is that it eliminates the need for trust. The distributed network itself provides the trust. This make me wonder what the banks think they are doing with blockchain technology. Their business is trust. We trust them with our money and we trust them to manage it digitally. When a distributed ledger provides that trust, the need for the bank itself diminishes significantly. As far as I can tell, a single bank is not and can never become a blockchain business.

However, Mastercard can. Mastercard is a networked business anyway. So the Mastercard effort makes good sense. Whether it will be successful in the long run is hard to predict. It will be less expensive. On balance the blockchain approach will help cut its costs. However, it may also find itself in direct competition with a blockchain startup that is doing exactly the same thing.

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