One of the panels at the OMFIF Digital Currency Symposium today explored whether blockchain could revolutionize payments. Perhaps the most important question is when blockchain is useful.
A matter of trust
Mu Changchun, who leads China’s digital currency initiative, answered this question in a previous session. He noted that Chinese consumers are spoiled for choice with daily payments. The use of blockchain for its retail central bank digital currency (CBDC) was a failure due to demand for speed of settlement and the scale of consumer payments.
However, China is also involved in the MBridge blockchain solution for cross-border payments with three other central banks. Blockchain was adopted because it gives control to each central bank, reducing the need for trust, and the scale of transactions is much smaller.
Scott Hendry of the Bank of Canada observed: “If there is a lack of trust between the main parties and there doesn’t seem to be any other way to bring them together, then maybe blockchain can help. to do it.
Is blockchain scalability solved?
The other panelists touched on the issue of scalability. David Creer of consultancy GFT Group argued that if a licensed private blockchain network uses the right technology implemented in the right way, then it can scale at the SWIFT transaction level, but not for every consumer payment. .
Christian Catalini of MIT said the scalability problem has been solved with sidechains and Layer 2 solutions for public permissionless blockchains.
There was a disagreement about this. Bank of Canada’s Hendry argued that when privacy-protecting technologies are included, the speed and scalability of blockchains are drastically compromised. If a transaction is “millions of dollars, you’re willing to wait a bit for privacy if that’s what you want.” But if you want a fast or even reasonably fast transaction, but you want privacy, they’re incompatible,” he said. An example of privacy-preserving technology is zero-proof.
On the other hand, Catalini noted that on some Layer 2 solutions, such as Bitcoin’s Lightning Network, instead of using privacy-enhancing technology, only the parties to the transaction have access to data from the same. way than traditional systems. And it scales. Catalini worked with Meta’s David Marcus at Libra/Diem, and they are again colleagues at Marcus’ startup Lightspark which provides a Lightning Network solution.
Meanwhile, the different blockchain challenges are not independent of each other. We have already seen the connection between privacy and scalability. There is also an overlap between privacy and interoperability.
Speaking of interoperability, Bank of Canada’s Hendry noted the conundrum of whether your blockchain’s privacy solution matches mine’s privacy solution. And whether that really works or we somehow go back to a bigger coordination problem where we not only have to have the underlying blockchain protocol talking to each other, but the privacy solution has to be compatible and the governance solution must be compatible.
Another topic that often arises for blockchain interoperability is the issue of bridges between blockchains, with bridges being targeted in many hacks.
“Until we get to a point where interoperability is trustless – and that’s a very difficult problem to solve – I don’t think you’ll see bridges really excel and succeed because they’re really fragile,” said Catalini of MIT. He is also concerned that assets embedded in different blockchains are considered the same when it comes to derivatives, both legally and in terms of security.
That said, Catalini doesn’t think interoperability is that important – on the public blockchain. According to him, the older established networks (Bitcoin and Ethereum) have such large pools of developers that they will make the most progress. If the business clusters around one or two networks, interoperability is less of an issue.
We noted yesterday, with the launch of the Canton Network for institutions, that permissioned blockchains are making progress in interoperability, but this has yet to be fully resolved in a trustless manner when networks use different technologies.
Compliance and identity
Catalini sees compliance as the biggest challenge. For stablecoins, while crypto-asset service providers can perform AML procedures, there is the thorny issue of self-custody wallets and the risk of P2P transfers being used by criminals.
Hence the need for identity solutions that are still not widespread.
“I’m really confident that given everything people are experimenting (with), eventually we’ll find a solution (to) this that I think the public sector and everyone else will be comfortable with,” he said. Catalini said.