Will blockchain revolutionize payments? – Ledger Insights

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

A question of trust

Mu Changchun, who heads China’s digital currency initiative, answered that question in an earlier session. He noted that Chinese consumers are spoiled for choice with daily payments. Using blockchain for its central bank digital currency (CBDC) was a non-starter due to the requirement 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, which reduces the need for trust, and the volume of transactions is far smaller.

Scott Hendry of the Bank of Canada observed: “If there’s 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 with that.”

Is Blockchain Scalability Solved?

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

MIT’s Christian Catalini said the scalability problem is solved with sidechains and layer 2 solutions for public permissionless blockchains.

There was some disagreement about that. 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 are incompatible, he said.An example of privacy protection technology is zero knowledge proof.

On the other hand, Catalini noted that on some layer 2 solutions, such as Bitcoin’s Lightning Network, instead of using technology that improves privacy, only the parties to the transaction have access to the data in a similar way to traditional systems. And it scales. Catalini worked with Meta’s David Marcus at Libra/Diem, and they are colleagues again at Marcus’ startup Lightspark, which offers a Lightning Network solution.

Meanwhile, blockchain’s various 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.

Blockchain interoperability

Speaking of interoperability, Hendry of the Bank of Canada noted the conundrum of “whether the privacy solution on your blockchain matches the privacy solution on mine. And whether it really works or whether we’re somehow back to a larger coordination problem where we not only have to have the underlying blockchain protocol to talk to each other, but the privacy solution has to be compatible and the governance solution has to be compatible.”

Another topic that often comes up for blockchain interoperability is the issue of bridges between blockchains, with bridges being targeted in a number of 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’re going to see bridges really excel and succeed because they’re very fragile,” MIT’s Catalini said. He is also concerned that assets packaged on different blockchains are seen as the same when they are derivatives, both legally and security-wise.

That said, Catalini doesn’t think interoperability is that big of a 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 converges 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 terms of 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 cryptoasset service providers can perform AML procedures, there is the difficult issue of self-custodial wallets and the risk of P2P transfers being used by criminals.

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

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