Blockchain-based currencies are a long way off
The game-changing technology is running up against significant obstacles.
This article could have been alternatively titled “Remember Libra?” Facebook’s Libra was announced all the way back in June 2019 to much fanfare. The virtual currency from everyone’s favorite social media company was going to change the game. Facebook was partnering with over 100 of the biggest companies in the world to bring Libra to life. It would be a cryptocurrency used from Afghanistan to Zimbabwe as the basis of a new global financial system. Well, here we are in September 2020 and there is not one single person using Libra to make a purchase around the globe.
As it turns out, global financial regulators don’t take too kindly to a tech giant thinking it can upend the way money is moved and processed. Facebook has encountered steep regulatory hurdles on its quest to create an alternative financial system. Now, instead of “something that could be a profound change for the entire world,” as the project’s chief David Marcus proclaimed last year, Libra’s ambitions have been pared down to a much narrower focus. Libra is now set to become a digital payments network in which coins are tied to local currencies. Far less profound than a fundamental change to the global financial system. And even with the diminished ambitions the launch date is still TBD.
Libra’s myriad difficulties in even launching are part of a broader trend: blockchain-based digital currencies are having a tough time achieving liftoff. While Facebook had to abandon the open architecture that was to serve as the foundation for its cryptocurrency, last week another announcement spoke to the difficult nature of blockchain projects. A major digital currency project involving 13 of the world’s largest banks will be further delayed into 2021. This “Utility Settlement Coin” has been in development for more than five years and is intended to streamline settlement processes between banks via digital versions of all the world’s major currencies. The banks intend to use blockchain to underpin this entire project. Once again, “projects have been delayed because of regulatory or operational hurdles.”
Blockchain has long been heralded as an industry-changing technology. But these two examples highlight the significant obstacles institutions face in creating a new status quo. Chief among the obstacles are regulatory concerns. It is no secret that the world of finance and payments is heavily regulated. So, when there is a new stablecoin proposal such as Libra, regulators’ ears immediately perk up and scrutiny arrives. Recently, Britain’s Central Bank Governor Andrew Bailey spoke on the topic of crypto assets, stablecoins, and central bank digital currencies. Bailey said “If stablecoins are to be widely used as a means of payment, they must have equivalent standards to those that are in place today for other forms of payment types,” said. Facebook might be larger and more powerful than some governments, but central banks still maintain control over their currencies and the rules of the road.
Beyond the regulatory hurdles, buy-in and general agreement from different actors with different motivations can halt progress. With the “Utility Settlement Coin,” it requires 13 global financial institutions to all be on the same page vis à vis a new way of exchanging currencies. Libra initially had dozens of partners. These massive, complex projects are a serious undertaking that take a level of coordination that is rare in a single, large organization, to say nothing of a dozen.
So blockchain has yet to transform the financial services industry in the manner people have predicted. That doesn’t mean it has no place in the operations of your bank. Instead of becoming the new architecture by which all contracts and transactions take place, it has proven more effective in specific, concrete use cases. Santander, for example, uses distributed ledger technology to power its One Pay FX international currency conversion service. ING has invested in securities lending platform HQLAx, which uses blockchain to facilitate efficient and high-speed trading of high-quality liquid assets. There are many intriguing possibilities in the insurance industry from claims handling to distribution methods.
Blockchain is certainly demonstrating some practicality in particular areas of banking operations. But fundamentally changing the way the world does business, let alone widespread adoption, remains a long way off. We published a report last year entitled Exploring the potential of blockchain. It is worth rereading, along with other older material on the technology, to compare the expectations to reality. It seems evident that potential was the right word for the title of that report, and the word is still operative today. Regulatory and operational impediments mean a Libra purchase in Zimbabwe is not in your near future.