Blockchain Unable to Meet the High Demands of Financial Market Infrastructure- Dutch Central Bank

The Netherlands central bank finds blockchain unfit for the financial markets infrastructure as it is unable to meet the high requirements of this space. After developing and experimenting with various prototypes of Distributed Ledger Technology, the bank believes this “interesting and promising” technology can meet these needs in future.

“Technology behind Bitcoin, the blockchain, interesting and promising”

The central bank of Netherlands has experimented with blockchain technology and find it unfit for the financial market infrastructure (FMI) for the time being. In its latest bulletin, Dutch’s central bank found many shortcomings viz. “inadequate capacity, inefficiency due to high energy consumption and lack of complete certainty about having paid a payment.”

However, DNB also finds blockchain, the technology behind Bitcoin interesting and promising that can meet FMI requirements in future.

According to the report, blockchain technology has been able to increase the resilience of the financial market against the external attacks. But again, this can be achieved only at the expense of capacity and efficiency.

Over the past 3 years, the bank developed and further evaluated four prototypes by utilizing Distributed Ledger Technology (DLT). With the code name Dukaton, the aim was to build knowledge and test the extent it can be useful in improving the payment and securities traffic.

The FMIs have a list of requirements viz. “safety, reliability, efficiency, payment finality (legal security), authorization, resilience, availability, capacity, scalability, costs and sustainability.” FMI being the central point in payment and security transactions, these requirements are extremely high.

Also, read: Huobi Exchange Plans its First Decentralized Blockchain “Huobi Chain”

Blockchain unable to meet high requirements of FMI

The prototypes revealed that blockchain solutions so tested are unable to meet these high demands for now.

According to the official report, the current payment systems can handle large volumes while providing the legal certainty of payment processing. Unlike these efficient systems, the blockchain solutions lack efficiency in energy consumption, costs and the volume of transaction it can handle.

The bank also notes that:

“there are algorithms that are resistant to malicious parties and can increase the cyber resilience of FMIs, but these algorithms currently do not meet the other requirements imposed on FMIs.”

But DNB sees the potential of blockchain and will continue to invest in its exploration and experimentation.

Recently, DNB also talked about its stance on central bank digital currencies (CBDC) which is the same as before. The bank maintains that the risks and uncertainties involved with it make financing expensive and could even speed up the event of crisis for banks.

Also, at the beginning of this year, the bank published a paper whereby it stated that cryptocurrencies do not pose a risk to the stability of the financial system. The small market share of the cryptocurrencies in comparison to fiat currencies and its high volatility are the prime reasons for the same.

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