In light of a new paper by Barclays examining crypto-currencies and the technology underpinning them, this publication spoke to a blockchain expert to get his take on the matter.

UK-based bank Barclays has weighed in on blockchain, the technology behind crypto-currencies, saying it is “a solution still seeking a problem”.

Despite a “tremendous hype” surrounding blockchain and crypto-currencies, such as bitcoin, the bank sees “little likelihood of widespread adoption in the near future,” Barclays said in a report published yesterday. 

The lender, which has a large wealth management division, said broader adoption of crypto-based technologies “faces critical challenges and strong incumbents”.

“At present, existing technologies appear to be sufficiently good, or even better, to deter broad crypto-technology adoption in money and finance,” Barclays said, suggesting the technology offers a solution for problems that do not currently exist in financial services.

Put simply, a blockchain is a distributed digital ledger kept on a network comprising thousands of powerful computers. There are hundreds of variations of blockchain technology, with each performing different functions. Transactions stored on a blockchain are indelible, and advanced cryptography is said to offer a high level of security. 

Widespread adoption faces four main challenges, according to Barclays: acceptance and trust; sovereignty and regulation; privacy; and irreversibility. The last point refers to blockchain’s inability to reverse a transaction once it has been executed. 

The bank did, however, examine five areas of money and finance where blockchain “may hold promise” -  smart contracts, asset custody, settlements, payments and fiat money substitutes. 

It concluded, though, that “incumbent technologies retain significant advantages over crypto-technologies at their current state of development”.

Blockchain rose to fame in 2009 as the technology underpinning bitcoin, the first and most well-known crypto-currency. 

Last year saw bitcoin’s meteoric rise as its value rocketed from under $1,000 to over $20,000 in less than a year, before retreating back to around $7,000 in today’s market.

While banks have generally steered clear of crypto-currencies in spite of their spot in the limelight, they have spent millions of dollars exploring the best use cases for blockchain technology in the hope that it could save them billions of dollars a year in the long run. 

Gary Nuttall, managing director at Distlytics, a blockchain consultancy, hit back at some of the comments in Barclays’ report.

“Fundamentally, I think the [Barclays] paper misses completely one of the founding purposes of crypto-currency, which is to provide an ability to make peer-to-peer payments without the need for an intermediary,” Nuttall, who has an extensive background in financial services, told this publication.

He continued: “This is where I question the ‘it’s no better than what exists already’, as all existing platforms use an intermediary.”

Nuttall addressed each of Barclays’ four main concerns surrounding crypto-based technology. 

Regarding the notion of acceptance and trust issues, he said: “Yes, that’s fair and it’ll take time for people to become comfortable with new ways of transacting. However, the mainstream banking system isn’t particularly well trusted, particularly with the banking collapse in 2008, the LIBOR rigging scandal, multiple fines for big banks for sanctions breaches and unethical behaviour.  That’s actually why bitcoin was created, because of distrust in the existing banking system.”

Nuttall went on to say that while “there is value in appropriate regulation… sovereignty isn’t necessarily supported by everybody”, citing Venezuela and Cyprus as examples showing “that having a government-backed banking [system] and currency isn’t necessarily a guarantee of security”.

Responding to Barclays’ point about privacy, Nuttall said: “The paper talks about public, unpermissioned blockchain models, such as bitcoin, but doesn’t consider other protocols.” He offered CORDA, developed by the R3 consortium, which counts several large banks as members, and Ripple, the blockchain-powered payment system owned by banks, as privately-permissioned alternatives. 

Barclays’ final main issue, irreversibility, “exists already in properly controlled financial systems whereby financial ledgers are unalterable and corrections are applied as adjusting journals, thereby creating an audit trail of changes,” Nuttall said.

“Is the author [of the paper] suggesting that their own financial systems are directly modified in a way that doesn’t keep an audit trail?” he asked.