Following three years of experimentation, the Dutch Central Bank has concluded that blockchain technology fundamentally fails to pass muster as a realistic replacement for current financial market infrastructures.
For evaluation purposes, De Nederlandsche Bank (DNB) created a series of four prototypes named Dukaton, that gradually scaled from a simple Bitcoin-style mining operation all the way through to a fully-functioning payments processing infrastructure operating across multiple nodes on a distributed ledger.
The Bank found definitive limitations in capacity, efficiency and certainty of payment, that compared unfavourably against current systems such as the Eurosystem's interbank settlement network Target2.
"Today's payment systems are highly efficient, can handle large volumes and offer the legal certainty that a payment is completed," states the Bank. "The blockchain solutions we tested proved to be inefficient - in terms of both costs and energy consumption - and unable to handle large numbers of transactions.
"Furthermore, several consensus algorithms we used will never achieve the full certainty of a transaction, so that it cannot be undone, which the central banks' Target2 system offers."
DNB does, however, believe that blockchain technology could ultimately improve a financial market infrastructure's resilience to external attacks, at the expense of its capacity and efficiency.
"Other algorithms are able to withstand parties with malicious intent and have the potential of raising the FMIs' cyber resilience, but they currently fail to meet other FMI requirements," states the Bank. "DLT may well offer enhanced efficiency in payments that involve multiple currencies, however."
The Dutch Bank's conclusions are slightly at odds with those of the South African Reserve Bank, which has just released details of 'Project Khokha', a proof of concept designed to simulate a ‘real-world’ trial of a distributed ledger technology (DLT)-based wholesale payment system.
The results show that the typical daily volume of the South African payments system could be processed in less than two hours with full confidentiality of transactions and settlement finality. Transactions were processed within two seconds, across a network of geographically distributed nodes, with distributed consensus providing the requisite resilience. The SARB was able to view the detail of all the transactions to allow for regulatory oversight.
The project was built on Quorum, using Istanbul Byzantine Fault Tolerance (IBFT), Pedersen commitments and range proofs to deliver on the combination of scalability, resilience, confidentiality and finality.
Despite the positives, the report notes that "there are many issues to consider before the decision to take a DLT-based system into production can be taken. Some of these issues relate to the practicalities of implementation, but also to legal and regulatory factors and to the broader economic impact. "