European Central Bank Now Loves the Blockchain
The European Central Bank (ECB) says it is testing the blockchain technology to improve bank security payment systems and for other purposes.
The European Central Bank (ECB) says it is testing the blockchain technology to improve bank security payment systems and for other purposes. Experts explain why it has made an obvious U-turn.
This pronouncement is included in the new consultative report of the ECB released this week and called Eurosystem's vision for the future of Europe’s financial market infrastructure about how to improve the bank security payment systems. So it is for this purpose that the ECB is testing blockchain applications.
“It's not surprising that the ECB is taking a closer look at blockchain technology, given the rapid advancements we have seen in this space over the past 12 months. While the ECB originally viewed digital currencies as "inherently unstable", policymakers are reexamining how a digital currency controlled by a central bank might provide faster, lower cost payments with more traceability. In today's environment of low or negative interest rates, digital currencies may also provide new monetary policy tools that were previously unavailable”, said Cambridge Blockchain’s head Matthew Commons.
And Michael Dalesandro of RockItCoin added:
“The major banks need to look at how this will reduce their fees. Many of the major banks are taking a leading role in shaping its future. Bank of America has filed for 15 blockchain-related patents and is currently drafting another 20 to be filed. JP Morgan has spent over $9 billion on technology investments with a major focus on block chain. In fact, over 25 banks are working together to develop the future of blockchian technology as it relates to the markets. Blockchain technology will be a disruptive force – in essence it is removing the middleman in a transaction, creating a faster and more secure process that reduces both operational cost and capital requirements.The impact on large banks that typically act as the financial intermediary (middleman) has the potential to be epic. They need to invest and attempt to control the blockchain technology – if not, banks stand to lose profits and relevance if they do not keep pace with decentralized fin tech innovation”.
Banks and Bitcoin: love and hate
Recently, on February 12nd 2015, ECB published an ebook, Virtual currency schemes – a further analysis, in which they commented:
“[...] although VCS can have positive aspects in terms of financial innovation and the provision of additional payment alternatives for consumers, it is clear that they also entail risks [...] For the tasks of central banks, such as those regarding monetary policy and price stability, financial stability, prudential supervision and promoting the smooth operation of payment systems, the materialisation of these risks depends on the volume issued for the respective virtual currency schemes, their connection to the real economy, including through supervised institutions involved with VCS, their traded volume and on user acceptance”.
Cryptocurrencies and Bitcoin law expert Stefano Capaccioli commented on a general behavior of banks towards blockchain:
“The blockchain is an innovation that allows to transfer values in a decentralized, simple and economic way. Nowadays banks are more focused on highlighting the problems (sometimes more theoretical than practical) rather than investigating the potential benefits and begin testing processes. This causes delays to competitiveness and cost reduction for users”.
New opportunities for Blockchain
“Many promising near term banking applications deal with shortening the settlement process for financial securities. This holds potential to reduce back-office expenses dramatically, while freeing up billions of dollars in unproductive clearing fund reserves that sit idle. Blockchain based payments are still a niche application for the conventional financial sector, but we've seen an explosion of interest and proof-of-concepts in this space. Identity management is one of the biggest challenges to get enterprise blockchain technology out of the labs and into production environments. Permissionless, open Blockchain architectures such as bitcoin or Ethereum typically achieve privacy through anonymity. On the other hand, many permissioned Blockchain designs for financial markets envision that all participants are explicitly identified, with key pairs tracing back to known individuals or entities. This traceability aids regulatory compliance and audit work, but often comes at the expense of privacy”.
So, the blockchain could improve the banking system, but still there are issues to be solved.
However, the fact that a lot of worldwide companies are testing the blockchain is really positive, as this means that the bitcoin technology is increasing its popularity.
Giacomo Zucco, CEO of BlockchainLab, commented:
"We are glad that institutions are starting experimenting and studying blockchain technology. Here at BLOCKCHAINLAB, we believe that blockchain technology, in the form of virtual currency as Bitcoin or smart-contract platform as Ethereum, could enable an incredible leap forward in the economic efficiency of society, but we also remind those same institutions that the disruptive potential of any technology can only happen if its permissionless nature is left untouched".