Why Blockchain May Not be Suitable for Commercial Banking?

As far as technology enthusiasts are concerned, blockchain is the most important invention since the wheel! It is very easy to find literature where technical gurus are praising blockchain as being the solution to all technology-related problems being faced by mankind. This overenthusiasm is the reason that most people believe that blockchain will revolutionize many industries including commercial banking.

However, this may not necessarily be the case. There are many industries and business cases where blockchain is not the ideal solution. Commercial banking may be one such case. This argument is gaining some traction since the economists at the Swiss Central Bank have stated that they believe that a blockchain-based system is highly inefficient and not suitable for central banking.

In this article, we will have a closer look at the various disadvantages which make blockchain unsuitable to be deployed in commercial banking.

  1. Energy Efficiency: It is important to note that the blockchain system requires a lot of computing power. Up until now, cryptocurrencies like Bitcoin have not even become mainstream. Yet, there is a lot of hue and cry about the quantum of energy that is consumed by this system. Now, commercial banking is a much more widespread network as compared to cryptocurrencies.

    If the commercial banking network were to extensively deploy blockchain-based networks, their energy consumption would be very high! This would be a significant problem since banks, like other corporations, are required to adopt practices that are eco-friendly in nature.

    If the entire commercial banking system were to work on blockchain, it would create a large-scale energy shortage. Energy companies would be forced to produce energy on a large scale. This could be a concern for the entire world since it may lead to an increase in pollution and global warming. Hence, unless the energy requirements of blockchain are cut down, it would be impossible to implement this system on a large scale such as in the commercial banking industry.

  2. Privacy: The blockchain system works on the basis of having multiple copies of the same data. This data is publicly available in a distributed ledger. Many corporations may not be comfortable having their data publicly available. This is because finances are a confidential matter and companies generally try to keep them under wraps.

    Any public disclosure is shunned unless it is required by law. Therefore, it is likely that banks may be able to switch over to blockchain when it comes to processes such as “know your customer” verification. However, many corporate customers may not be comfortable with their data being stored on a publicly distributed ledger.

  3. Risk of Failure: A blockchain is a form of information technology system. Hence, just like all systems, this system is also likely to experience breakdowns. The problem with commercial banking is that large sums of money tend to be involved in transactions and hence breakdowns can become particularly expensive and even catastrophic.

    For instance, blockchain-enabled smart contracts are created to transfer money based on certain conditions being met. It is likely that these contracts may malfunction and that money may not get transferred at the correct time or worse it could get transferred to the wrong counterparty! Even though blockchain systems are thoroughly tested for bugs, there is always a small chance that there might be a risk of very expensive failures and such failures may not be acceptable to the stakeholders.

  4. Implementation Costs: Blockchain systems are a completely different type of technology as compared to the current technologies being used by banks. Hence, if a commercial bank decides to move on to a blockchain-based system, it can prove to be very expensive for them. They will have to build a completely new system. Such a system will have to be built in phases and may take years to implement.

    Also, the very large volume of transaction data that commercial banks hold will have to be migrated to the new system. Reconciling all this migrated data can also be very expensive and time-consuming. These extensive costs with no immediate payback make the implementation of blockchain an unviable proposition.

  5. Maintenance Costs: Not only is a blockchain-based system expensive to implement, but it is also quite expensive to maintain for commercial banks.

    A blockchain-based system requires the participation of several miners. Miners are only interested in the process because they get a fee for their services. The end result is that the maintenance costs rise exponentially. These costs are not offset by the reduced data security expenses and end up increasing the cost of every transaction.

  6. Learning Curve: A blockchain-based banking system will be a significant change for each and every stakeholder. This means that all stakeholders will have to go through an extensive learning curve.

    Commercial banks will have to train their employees and customers to quickly adapt to the changes. Such training may be expensive and time-consuming. Also, the learning curve may be quite steep and banks can expect mistakes to be made by these stakeholders. The learning process could be a major inconvenience to various stakeholders.

Hence, it can be said that even though blockchain may resolve some of the problems being faced by modern commercial banks, it may also cause a lot of inconvenience and costs. Commercial banks will have to evaluate these costs against the projected benefits in order to decide whether or not the implementation of blockchain technology is worth it.

Our Team

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.