Why Banks Will Fail to Apply Blockchain Technology

Despite years of development, the finance industry has failed to showcase a working application of the blockchain technology. Experts believe that banks may have overlooked the most important concept of the technology: decentralization.

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Why Banks Will Fail to Apply Blockchain Technology

Despite years of development, the finance industry has failed to showcase a working application of the blockchain technology. Experts believe that banks may have overlooked the most important concept of the technology: decentralization.

The formation of the R3 consortium and the increasing interests from major multi-billion dollar banks have led blockchain to become an international phenomenon.

Large financial institutions and government agencies rushed to implement the technology in various areas of their operations, specifically to optimize the settlement of financial transactions.

Applying Blockchain on existing infrastructure

Banks for instance, have focused on applying the technology on their existing IT infrastructure and financial systems to process cross-border payments, settlement and clearance of assets to reduce cost and time dealt by both the bank and the customers.

Venture capital firms naturally followed the shift in trend, moving from traditional fintech to blockchain startups, with support from banks and government-backed organizations.

However, with hundreds of millions of dollars spent on the development of blockchain-based financial systems, the finance industry is yet to provide a working demonstration of the product.

Why decentralization matters

The major reason behind the banks’ failure to deal with the blockchain technology is their ambition to create private blockchain networks that could run parallel to their existing applications. Which means, rather than utilizing the open and distributed network the blockchain technology can provide, the banks attempted to reinvent the technology for their own benefits.

Decentralization, the concept which the banks failed to address, is the backbone of the blockchain technology and is the element that makes a blockchain network valuable and robust.

To date, the only really successful example of the blockchain technology has been Bitcoin, because of the Bitcoin network’s decentralized and transparent nature.

Financial regulations

The problem with the banks’ approach fundamentally is associated with the financial regulations and compliance they’re required to deal with.

Since banks are demanded by local and global authorities to follow strict Know-your-customer (KYC) and anti-money laundering (AML) regulations, they must operate a private blockchain network to provide personal and private data of their customers to the law enforcement.

Thus, unless the banks can give up on the idea of developing private blockchain networks and applying that to their existing systems, the finance industry will struggle to see a working implementation of the technology.

Data-driven platforms

This inability of the banks have also led to a significant change in the trend of the blockchain technology in the market, with startups migrating from financial applications of the blockchain to data-driven platforms.

Such platforms have proved their efficiency in the insurance, real estate, and trade finance industries, with Europe’s top blockchain startups showcasing various functional products that are applicable to many industries.    

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