Will blockchain revolutionize payments? – Ledger Insights

One of the panels at the OMFIF Digital Money Symposium today explored whether blockchain can revolutionize payments. Perhaps the most important question is when blockchain is useful.

A matter of trust

Mu Changchun, who heads China’s digital currency initiative, answered that question in a previous session. He noted that Chinese consumers are spoilt for choice with everyday payments. Using blockchain for its retail central bank digital currency (CBDC) was a nonstarter because of the demand for speed in 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 far smaller.

Scott Hendry from the Bank of Canada observed, “If there is a lack of trust between the principal parties and there doesn’t seem to be any other way to get them together, then maybe blockchain can help do that.”

Is blockchain scalability solved?

The other panelists addressed the scalability issue. David Creer from consultancy GFT Group argued that if a private permissioned blockchain network uses the right technology implemented in the correct way, then it can scale to the level of SWIFT transactions, but not for every single consumer payment.

MIT’s Christian Catalini said that the scalability issue has been resolved with sidechains and layer 2 solutions for public permissionless blockchains.

There was some disagreement on that one. The Bank of Canada’s Hendry argued that when privacy preserving technologies are included, the speed and scalability of blockchains are radically compromised. If a transaction is for “millions of dollars, you’re willing to wait a little while to get privacy if that’s what you want. But if you want a fast transaction or even reasonably fast, but you want privacy, they’re incompatible,” he said. An example of privacy preserving technology is zero knowledge proofs.

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 parties to the transaction are privy to the data in a similar way to traditional systems. And that scales. Catalini worked with Meta’s David Marcus at Libra/Diem, and they’re colleagues again at Marcus’s startup Lightspark which provides a Lightning Network solution.

Meanwhile, blockchain’s various challenges are not independent of each other. We’ve already seen the linkage between privacy and scalability. There’s also an overlap between privacy and interoperability.

Blockchain interoperability

Talking about interoperability, the Bank of Canada’s Hendry noted the conundrum of “whether the privacy solution on your blockchain matches with the privacy solution on mine. And whether that really works or we’re somehow back to a greater 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 has to be compatible.”

Another topic that often arises for blockchain interoperability is the issue of bridges between blockchains, with bridges being targeted in numerous hacks.

“Until we get to a point where interoperability is trustless – and that’s a very hard problem to solve – I don’t think you’ll see bridges really excel and succeed because they’re really fragile,” said MIT’s Catalini. He’s also concerned about assets wrapped on different blockchains being viewed as the same when they are derivatives, both legally and in terms of security.

That said, Catalini doesn’t believe interoperability is such a big deal – on public blockchain. In his view, the older, established networks (Bitcoin and Ethereum) have such large pools of developers that they will make the most progress. If activity coalesces 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 on interoperability, but it still needs to be fully resolved in a trustless way where networks use different technologies.

Compliance and identity

Catalini sees the biggest challenge as compliance. For stablecoins, while crypto asset service providers might perform AML procedures, there’s the thorny question of self custody wallets and the risk of P2P transfers being used by criminals.

Hence the need for identity solutions that are not yet prevalent.

“I’m really confident that given everything that people are experimenting (with), eventually we’ll land on a solution (to) that, that I think the public sector and everyone will be comfortable with,” said Catalini.