Challenges of blockchain technology

Blockchain and distributed ledger technology offers significant and scalable processing power, high accuracy rates, and apparently unbreakable security at a significantly reduced cost compared to the traditional systems the technology could replace, such as settlement, trading or accounting systems. Like all new technology however, it poses challenges for suppliers and customers. So what are the key issues in relation to blockchain and distributed ledger technology?


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Performance challenges

Blockchain databases grow rapidly in size as new transactions are written, and there is a concern that the size of database required, and the consequent speed of access, may make it unsuitable for certain forms of transactions where speed is of the essence. In this regard, the scalability and resilience of a blockchain solution is clearly of the utmost criticality, particularly where the service is used as part of a financial institution’s ability to fulfil trading obligations, customer interactions or regulatory requirements.

Jurisdiction

Blockchain has the ability to cross jurisdictional boundaries as the nodes on a blockchain can be located anywhere in the world. This can pose a number of complex jurisdictional issues which require careful consideration in relation to the relevant contractual relationships.

Nascent Phase

At the moment, many blockchain solutions are in a development or low adoption phase and, as a consequence, the technology and policies offered are relatively untrusted. Many organisations will therefore be uncertain of using services in relation to business critical activities without a high degree of confidence in the quality and stability of services it will receive. Vendors will need to be prepared to provide a level of protection to customers via not just the solution but the contractual terms themselves.

Data privacy

As one of the key USPs of the blockchain is that once data is stored it cannot be altered (at least, not easily), this clearly has implications for data privacy, particularly where the relevant data is personal data or metadata sufficient to reveal someone’s personal details. The use of crypto-addresses for identity is problematic as no bank likes providing its competitors with precise information about its transactions and the banking secrecy must be kept by law.

The enforceability of smart contracts

Blockchain makes possible the use of so-called “smart contracts”. Smart contracts are blockchain based contracts which are automatically executed upon certain specified criteria coded into the contract being met. Execution over the blockchain network eliminates the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. In addition to the cost and efficiency gains it is hoped this will achieve, this also raises significant legal questions in relation to applicable regulation, leaving a sense of uncertainty as to the legal enforceability of smart contracts.


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Finish Line

As is the case with newest technology service offerings, there are a number of risk based issues that need to be carefully considered before business, particularly heavily-regulated ones, can start to fully realize the potential benefit.