Why Blockchain Might Not Be The Future For Online Payments

When it comes to making payments online, cryptocurrencies such as Bitcoin are a method of alternative payments using blockchain technology to allow someone to make transactions without the need of an intermediary. Since transactions are made through the publicly distributed ledger of a blockchain, the transaction history is not contained in a central repository or with a single administrator, making it a decentralized digital currency that is secured with a series of network nodes that verify transactions.

This disruptive technology of managing transactions can help financial organizations to increase the speed settlement, create certainty of ownership and improve transaction transparency, however, it also raises a lot of complications which might prevent it from being the future for online payments.

First, a look at blockchains.

A blockchain is a distributed database that is used to maintain a list of records, called blocks, throughout a network. Each of these blocks is labeled with a timestamp and linked to the previous block, creating a chain of information throughout a network. When payments are made using blockchain, it looks something like this:

1. Person 1 wants to send money to Person 2
2. A transaction is represented online as a block
3. The block is broadcasted to every party in the network
4. Those in the network approve the transaction if it is valid
5. The blocks are added to a chain, providing a record of transactions
6. The money is sent from Person 1 to Person 2

Since blockchain transactions (such as using Bitcoin to pay for things) uses a network to approve the transaction, it eliminates the need for a single administrator to approve payments. Additionally, in order for data to be changed in a blockchain, every block along the chain needs to be edited, making it resistant to hacking and security to be generally pretty good.

The problems of blockchains.

Despite the benefits of using blockchain, there are multiple downsides to using the new database technology that have negative connotations to it becoming the next online payment method.

First is security. Though blockchains are inherently resistant to security breaches due to their design once a blockchain has started, both the automated value transfer and permanent transaction record do not eliminate the potential for transaction fraud. The risk exists at the creation of each account. Hackers who manage to enter somebody’s account still can modify transactions to make it look like a genuine transaction. To ensure that each transaction is secured around the clock, system regulation also needs to function 24/7.

The second problem is scalability. One of blockchain’s major advantages is its speed of operations compared to existing systems. While blockchain transactions are currently happening almost instantaneously, once the technology gains popularity and transaction volumes increase, transaction speed on the network will degrade, similar to how driving down the highway at 7 am is much faster than driving down it during rush hour.

A third concern relates to client privacy, which has been one of the key pillars of the banking system. Financial institutions, especially banks, have an extensive need for privacy which they will be unable to maintain under the unprecedented transaction transparency. And this level of transparency doesn’t stop at the client level. Due to blockchain’s open architecture for executing and facilitating transactions, banks will be able to monitor each other’s activities.

A final challenge lies within the changes which are required in the current financial regulatory policies. In order to deal with the many regulatory implications that blockchain has raised and which don’t fit within the existing legal framework, amendments are required to policies ranging from money laundering and property ownership legislation to privacy laws.

The challenge in blockchain adoption.

A major hurdle in blockchain adoption is the slow adoption by merchants, which means customers have limited ability to pay for their purchases with digital currencies. Currently, roughly 200,000 merchants worldwide are accepting cryptocurrencies, with large multinationals such as Burger King testing Bitcoin as a method of payment. However, research by JP Morgan has shown that merchant acceptance is shrinking despite the appreciation of several cryptocurrencies over the past months.

Merchant adoption is slowing as a result of blockchain scalability issues which are slowing down transaction speed and often forcing the retailer to bear additional transaction cost. Also, the lack of industry pressure to accept cryptocurrencies as a form of payment contributes to the slowdown. A further barrier for adoption is the recent appreciation of several cryptocurrencies, Bitcoin and Ethereum in particular, which has made consumers reluctant to spend them in anticipation of future price increases, making them in effect more of an asset rather than a currency.

As with any new technology, blockchain will have its initial challenges when it grows. There is no denying that the principle that governs blockchain has great applications across several industries. The question is simply if the current format will be able to create the wider momentum this technology needs to gain traction and scale.