Blockchain and distributed ledger technology (DLT) are so often misunderstood, especially in the context of the banking industry. Why is this the case? Let’s clear up some of the most misconceptions concerning the uses of these technologies in banking, stacking up the misconceptions against the facts.
Having worked with blockchain and DLT for the past several years, I’ve seen the banking industry undergo a period of immense change. Last year, banks across the globe showed a broad range of responses to digital currencies.
Several states announced plans to launch pilot central bank digital currencies (CBDCs), including Singapore, India, China, and Turkey. Early this year, the Bank of England (BoE) and HM Treasury announced similar plans in the form of an extensive consultation paper.
This plan was dubbed “Britcoin” in the UK press. Despite the hype, the reality was that many questions were left unanswered by the consultation paper, and many banking customers have been left understandably confused by how a digital pound would impact their daily lives.
To better understand the realities of implementing blockchain and DLT-powered technologies into banking, let's explore three of the most common misconceptions surrounding them.
1. The blockchain is inherently risky
An extremely common perception among the public, consumers, and industry professionals alike is that operating in the blockchain is inherently risky. This simply isn’t correct.
With any banking infrastructure, there is the risk of a security breach. In fact, some of the largest security breaches in history have occurred at organisations within the Banking and Financial Services industry. In May 2019, more than 800 million financial and personal records were leaked from The First American Corporation1. In the end, it was revealed that the cause of this leak was an error in the website design.
Errors of this kind can occur with any website. Therefore, there have certainly been instances when breaches have occurred on the websites where blockchain banking solutions are hosted. However, and this is the important point here, it is not the blockchain itself that has been hacked.
In this way, there is no inherent risk to implementing blockchain or DLT-powered technologies into banking ecosystems. Security breaches can occur in any form of online banking, and customers should not be scared away by blockchain or DLT alone.
2. There is one clear route to implementation
As previously mentioned, the BoE and HM Treasury’s consultation paper fell short of laying out a concrete roadmap to show how a digital pound would actually be implemented in the UK. When it comes to implementing these technologies, banks and financial institutions (FIs) have a huge array of options at their disposal.
Many assume that the plans for the so-called “Britcoin” will result in the creation of a cashless society. This assumption has perhaps been fuelled by the closure of numerous bank branches across the country. However, to say that the BoE and HM Treasury exploring the use of a CBDC guarantees a cashless future for Britain is simply incorrect. Many cash-heavy societies, such as China and India, have also explored the use of digital currencies.
The reality is that what implementation will actually look like isn’t yet clear. We will have to wait and see if the BoE and HM Treasury release more concrete plans before we can assemble a true picture of what the future holds.
3. Digital currencies and scandals go hand in hand
With the influx of media coverage around FTX’s collapse and other similar scandals, it can be difficult to separate the volatile world of cryptocurrency from the broader technology of blockchain and DLT. Cryptocurrencies are one way to use blockchain technology, but there are many others.
The aforementioned CBDCs are just one example, with uses in IoT, distributed ledgers, and smart contracts being just a number of alternative examples. Scandals should not define blockchain and DLT as a whole. Moreover, scandals like the collapse of FTX should not scare people away from exploring the almost endless capabilities of blockchain and DLT for cutting-edge use cases.
With all of these misconceptions in mind, education is vital. Truly understanding blockchain and DLT is the key to unlocking their untapped potential and implementing them in the areas where they can add the most value.
Banks and FIs seeking to take advantage of blockchain and DLT should partner with an industry expert, one with entrenched expertise working with these technologies across a range of use cases.
If you want to find out more about our work in blockchain and DLT and how we can help you safely implement these technologies, get in touch today.