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Obstacles To Blockchain Adoption

Blockchain is going to change everything, but whats stopping it?

14Sep

The race to adopt blockchain is on across all industries, with the recent news that AirBnB has hired blockchain coders evidence that it is finally being taken seriously. Financial services in particular - arguably its spiritual home - is seeing a fear of falling behind the competition create a real drive to investigate all possible applications for the technology.

Blockchain made its name as the technology behind bitcoin, a cryptographically secure public register of transactions operated by a decentralized peer-to-peer network. The advantages of blockchain are many, primarily in helping to cut costs by ensuring a greater level of trust in the information it holds, removing the expense of having to have a middle man validate it.

The speed of blockchain adoption has greatly benefited from its emergence during a period of tremendous digital upheaval, which has already uprooted most sectors of the global economy. Both organizations and governments alike are now blockchain-ready and agile enough to cope, while many tech companies have the digital infrastructure needed to incorporate it. However, there are still a number of challenges to overcome.

Cybersecurity

There is much debate around whether or not blockchain helps or hinder security. On one hand, blockchain has proven itself vulnerable to security issues, with cybercriminals able to attack Ethereum’s DAO in June, draining over $60 million. Hong Kong-based digital currency exchange, Bitfinex, was also relieved of $65 million in August. The World Economic Forum’s recent report on blockchain’s potential to transform the financial infrastructure expressed some concerns over the opportunity for malicious behavior and potential gaps in security.

Many argue that because everybody has to agree to the transaction, it is actually more secure. Arvind Krishna, senior vice-president of IBM Research, agrees, but has reservations for the time being, noting that: ’Since everybody has to agree to the transaction it is a lot more secure than what we have today, where all you have to do is get in to one computer. It may take some time, but it is hoped that with the advancement of blockchain technology it will provide a system that is clearer so that it is easier to see if money has been stolen while providing a foundation to learn from previous mistakes.’

Permanency

Making a mistake in the financial services industry, even if it is just an extra 0 added somewhere accidentally, can lead to huge losses. The basis of blockchain is that it cannot be reversed, which would, theoretically, mean any mistake make could not be corrected. The issue of trying to reverse mistakes made on blockchain was highlighted in the aftermath of the Ethereum hack, as developers tried to retrieve the stolen tokens. The developers’ first solution was to close the DAO and return all funds to its original investors. However, as any executed transaction is irreversible and there is no controlling authority to return the money, they had to essentially hack the hacker to steal the money back - an effort that was was largely unsuccessful. Ultimately, a so-called ‘hard fork’ of the entire Ethereum blockchain was needed - a rollback of the malicious DAO transactions, essentially rewriting the Ethereum transaction ledger to remove about 12 million Ether tokens from the hackers’ accounts.

Such a move goes against the underlying principle of blockchain, and has many critics. Mark Nuttall, Partner, Capital Markets Practice, Linklaters, is among them, arguing: ‘Blockchain will create some fascinating dilemmas for the sector – its strength is that it is a perfect, un-hackable and unchangeable record – but how then will courts and regulators enforce their decisions when this by definition means changing the record? And if there is a 'skeleton key' to the system held by a regulator or institution, then the heart of blockchain, with its promise of no single point of failure, has been lost.’

Equally, however, you would have thought you would change it by appending new information. So, if I accidentally send someone $1000 and get a judge to make you pay it back, the change would be a new transaction of $1000 from you to me. That maintains history and doesn’t go against the grain of the tech. While canceling transactions may be harder, but reversal should technically be easy, at least between willing parties.

Lack of talent

Vijay Michalik, research analyst for consultancy firm Frost & Sullivan, argues that: ‘The challenges of legacy infrastructure will be the main obstacle. This is coupled with the challenges of technical understanding – the practicality of implementing decentralized cryptosystems falls outside of the traditional IT development skill-set’ Dave Hrycyszyn, director of strategy and technology at digital agency Head, agrees with him, arguing that, ‘Blockchain technology is currently so specialized and inaccessible that it's unavailable to most people, even highly technical ones.’

To date, banks have invested hundreds of millions developing blockchain on their existing IT infrastructure and financial systems, yet the finance industry is yet to really apply technology. It is clear that there are issues, and the most likely is that there is simply a lack of talent available. As blockchain becomes more mainstream, this will change. Whether rushing head first into adoption the technology is a good thing, however, remains to be seen.

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