The potential benefits of blockchain technology for the banking industry are compelling, but legal, security and technical risks still represent substantial barriers, a report published Monday from Toronto-based DBRS Ltd.
Although the prospect of blockchain technology to improve efficiency and automation of banks’ operations is promising, “the technology is still immature and poses challenges for future applicability in the banking sector, particularly with regards to operational and reputation risks,” the credit rating agency says in a news release.
The report, Blockchain in Banking: A Reality Check, states: “The hype around blockchain amongst financial institutions and start-ups (fintechs) is backed by its extensive applicability. It can be implemented as disruptive technology, or as the backbone for market infrastructures of digital assets. It can be used as an enterprise software platform to streamline business processes or as a tool to improve transaction management and record retention.”
For banks, the technology is appealing because of its potential to improve efficiency, security and speed, DBRS says, and the rating agency expects financial institutions to increase their spending on blockchain-related projects.
Yet, at the same time, most of the technology’s potential applications are still at an early stage of development, according to the report.
“The architecture of blockchain is complex and involves several components. The robustness and functionality of the system largely depends on consensus methodology, the number of nodes that are needed to validate a transaction, as well as the mechanism of governance which regulates the access of the participants and their level of reliability. Other than these aspects, questions arise on the interoperability between the systems of different institutions and integration challenges with existing infrastructures,” states the report.
Moreover, blockchain faces other risks, including cyberattacks and fraud, according to the report.
Yhe lack of regulation in this area “creates uncertainty about systems’ compliance with future legislative frameworks. Uncertainty remains also regarding the validity and enforceability of smart contracts, whilst concerns arise for privacy and data protection,” the report states.