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The Netherlands’ Central Bank: Blockchain Doesn’t Yet Meet Demands of Financial Markets

Blockchain technology is not yet ready for implementation in financial markets, according to a report by De Nederlandsche Bank (DNB) on June 7.

After three years of experimenting with Distributed Ledger Technology (DLT), of which blockchain is one type, DNB — the central bank of the Netherlands —  has concluded that the current algorithms are unable to handle the volume of transactions of financial market infrastructures in a 100%-secure and energy-efficient way.

According to the bank’s report, DNB has developed and evaluated four prototypes with the aim of gaining a better understanding of the technology and its potential usefulness for improving payments and securities traffic.

After evaluating the results of their tests, DNB concludes that, while blockchain technology is “interesting and promising,” current systems that do not use DLT “are very efficient, can handle large volumes and provide the legal certainty of having paid.” The report continues:

“The blockchain solutions tested show that they are not sufficiently efficient, with regard to costs and energy consumption, and they can not handle the large numbers of transactions.”

De Nederlandsche Bank is not the only central bank looking at the impact blockchain tech and cryptocurrencies might have in banking. In March, the Treasury of the UK announced the launch of a cryptocurrency task force made of the Bank of England and the Financial Conduct Authority. More recently, at the Money20/20 conference in Amsterdam on June 5, leaders from the Bank of England, the Bank of Lithuania, the Bank of Canada and the Swiss National Bank spoke about the relationship between cryptocurrency and the traditional banking sphere.

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Dutch Central Bank: Blockchain 'Promising But Inefficient' in Payments

Blockchain technology isn’t a beneficial addition to the payment system in the Netherlands – at least not yet, according to the country’s central bank.

In a blog post published Thursday, De Nederlandsche Bank (DNB) came to the conclusion that distributed ledger technology (DLT) is not suitable for its existing financial payment infrastructure due to its insufficient ability to scale for large volumes of transactions and other issues.

The DNB offered the opinion based on the results of a project called Dukaton, which conducted a series of experiments that has tested four DLT prototypes over the past three years.

Dukaton set out to conduct research in a bid to understand how much value the nascent technology can bring to the country’s existing payment system. Basing its first prototype on the source code of the bitcoin blockchain, the team applied different consensus algorithms and validation mechanisms in later stages.

Following the tests, the central bank acknowledges that blockchain can increase the resilience of financial infrastructure against external attacks, however, this benefit comes at the expense of “scalability, capacity and efficiency,” it says.

The bank wrote in the post:

“The current payment systems are very efficient, can handle large volumes and provide the legal certainty of payment. The blockchain solutions tested show that they are not sufficiently efficient, with regard to costs and energy consumption, and they can not handle large numbers of transactions.”

That said, the DNB does not rule out the possibility that, as the blockchain industry moves forward, a better designed algorithm would be able to meet all the technological thresholds required by the Dutch financial system.

To that effort, the central bank said it will continue investing in further application development and conducting experiments with blockchain technology.

In similar work, South Africa’s central bank yesterday announced positive results for its trial of its blockchain-based system for interbank clearance and settlement.

The South Africa Reserve Bank said it had completed a 14-week “realistic” proof-of-concept that settled the country’s typical 70,000 daily payment transactions within two hours, while preserving full confidentiality.

That platform was built on top of Quorum, the enterprise blockchain platform developed by investment bank JPMorgan

DNB image via Shutterstock

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