Written by Stefan Grasmann, Chief of Blockchain and Ammar Ahmad , Senior Consulting Manager of Zühlke.
August 2024
Blockchain technology has the potential to democratise finance through increased liquidity, disintermediation and transparency. However, incumbents have primarily focussed on private ledgers, which lack public verification. Despite the challenges, there is growing interest in public blockchains.
A roundtable discussion held at the Point Zero Forum in July 2024 addressed the topic of "Permissionless Blockchain in Financial Services". The discussion focused on the reasons behind the limited adoption of these blockchains and the changes necessary to facilitate their wider adoption.
The State of Play
1. Settlement finality: Financial institutions require deterministic settlement finality, unlike the probabilistic nature of blockchain finality. Current blockchain research is exploring solutions to improve this.
2. KYC/AML: The implementation of KYC/AML regulations presents a challenge primarily due to the lack of a standard identity scheme. However, technological advancements and multi-layer frameworks are improving KYC processes and traceability on permissionless blockchains, implying that this is a temporary hurdle.
3. Cost: Moving to a public blockchain entails substantial costs, including exchange fees and compliance with regulatory frameworks. These costs are expected to decrease with wider adoption and emerging solutions for cost reduction.
4. Risk management: It is difficult to meet the high standards for risk management and operational resilience for public blockchains due to a lack of clear standards and requirements. Regulatory specificity is needed to support investment, adoption and scale.
5. Confidentiality: Public blockchains transparency conflicts with privacy requirements. Research into Zero-Knowledge Proofs (ZKP) and Fully Homomorphic Encryption (FHE) aim to address these issues, but practical solutions have yet to be developed.
6. Interoperability: Technical complexity in interoperability have slowed down blockchain adoption as users determine which chains they wish to invest in. A standardised protocol for universal integration across different blockchains would derisk investment and focus competition on value creation rather than costs to change. This is a desired future state for the maturing of this technology.
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