Limitations of Blockchain

Limitations of Blockchain

On September 14, I have the privilege to attend Capital Markets Blockchains 2016, organised by Euromoney.  The conference explores the application of Blockchains in the capital markets.  One of the programs is a panel discussion titled “Hong Kong’s regulatory environment for FinTech and Blockchain”.  I find the discussion absolutely engaging. While many are very excited about how blockchains are going to revolutionise payment system, KYC process and settlement, the panelist reminds us that for blockchain to become truly useful, it still have a few hurdles to climb.  In the midst of all the excitement and promises related to blockchains, the views of the panelists are refreshing.

The first issue on everyone’s mind is privacy.  After all, blockchain is a distributed ledger, which means all information on the chain will be stored at all the nodes of the users. While theoretically blockchain is very very hard to hack.  However, Joesph Wang, the Chief Science Officer of Bitquant Research Laboratories, points out that there has been a lack of privacy protocol to address the issue.  Without a protocol, it is very hard for blockchain to be adopted on a large scale.  Not only that, there is the weakest link issue.  The access to the information on the blockchain depends on a personal key.  It has been many cases reported that the personal keys have been stolen or hacked.  At this moment the information or the digital asset is only as secure as your personal key.

The second issue is regarding the enforcement of the smart contracts.  One of the key promises of the blockchain is the smart contract, a digital contract that executes itself without a mediator.  However, as Adam Vaziri of Diacle, a blockchain lawyer, points out, you need a human judge to intervene if a dispute arises between the two counterparties.  One counterparty is very likely to convince the judge that he has a lack of computer expertise in entering the contract.  The judge himself may have difficulty understanding a digital contract.  So this is truly an uncharted territory.

Lukas Petrikas of the HKEx points out that while blockchain can speed up the settlement process to real time settlement, it will also drain away the liquidity of the market as all securities have to be paid off immediately.  In fact, current technology already allows shorter settlement period.  However, HKEx is concerned that faster settlement may be detrimental to the liquidity of the market.

Lastly, Joesph rightly points out that blockchain currently is not user friendly.  So a better user interface would be helpful to developers and users.  Also many of the applications associated with blockchain like smart contracts and database can be written with other technologies like SQL and Javascripts which are much more developed.  So Joesph’s advice is that avoid blockchain if you can.  There is probably another way to do it simpler.  

Kyle Wong, Ph.D. and CFA, is an educator, hedge fund manager, columnist and entrepreneur. At Kaplan Financial he teaches CFA and other financial programs for the public and financial institutions. He is the Chief Operating Officer at Avant Capital Management (HK) Limited, which is one of the top ranked hedge fund companies in Asia. He has been contributing regularly to iMoney. He is one of the founders of MissFQ.com, a portal dedicated to FinTech.