De Nederlandsche Bank (DNB), the Dutch central bank, is not convinced of the transformative potential of blockchain. In a recent blog post, the bank declared that the technology had failed to meet the “demands of a financial markets infrastructure.”
DNB, which claims to have experimented with blockchain over the past three years, said the technology fell short of expectations because of its lack of capacity, high energy consumption, and inefficiencies in payments.
Nevertheless, the institution has not pulled the plug on its blockchain experiments as it still thinks the technology is promising.
In the past three years, the Dutch central bank has tested blockchain in four prototypes under a project called Dukaton. The prototypes started with Bitcoin-like systems to create a new token called Dukaton and ended with the creation of a whole payment processing platform that applied a network of blockchain nodes.
Based on the trial results, DNB concluded that the blockchain solutions tested had failed to satisfy the requirements for financial market infrastructures. The latter have to meet a wide list of conditions related to capacity, availability, authorization, costs, efficiency, reliability, security, legal certainty (payments), scalability, sustainability, and resilience. All of these aspects are very important for financial market infrastructures, and blockchain does not come up to scratch on several counts.
DNB is still satisfied with the current Eurosystem interbank payment solution. Called Target2, it can handle multiple transactions and provide legal certainty in terms of payment completion. Blockchain was not efficient when it came to costs, energy consumption, and dealing with high transaction volumes.
“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. 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,” the bank said.
“DLT [distributed ledger technology] may well offer enhanced efficiency in payments that involve multiple currencies, however,” it concluded.
Interestingly, Yves Mersch of the European Central Bank boasted at the beginning of this year that ECB’s Target Instant Payment Settlement (TIPS) system is much better than blockchain.
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