By Rawan Bou Hassan | Staff Writer
As Fred Ehrsam, co-founder of Coinbase, once said that “Everything will be tokenized and connected by a blockchain one day.” Blockchain technology was invented in 2008 by Satoshi Nakamoto. It is essentially a digital ledger of online transactions that is duplicated and distributed across the entire network of computer systems and smartphone apps through high-speed and user-friendly methods. The Nakamoto consensus established specific procedures to validate these transactions and connect them to an unbreakable chain of blocks, known as blockchain, that is cryptographically coded (Bonson & Bendarova, 2019). The idea for Blockchain technology and especially Bitcoin began as a means for creating a secure currency that had no centralized control. This proposed currency transformed the concept of online transactions into several traded currencies and implementations such as Bitcoin and Ethereum, used in exchanges and transactions around the globe. Moreover, blockchain technology is no longer only for cryptography and cryptocurrency enthusiasts, but it also inspired other applications such as smart contracts. Soon enough, bitcoin became the first digital currency to successfully solve the double-spending problem without the need of a trusted authority.
Particularly in the financial service industry, the integration of blockchain technology is a remarkable milestone as BCT can foster both coordination, communication, and cooperation. Still, BCT has different threats, where the financial, technical, and ethical ramifications are dangerous to the organizations and users alike. The financial service organizations in the US are encountering significant adoption challenges such as costs, scalability, and security.
Regarding costs associated with employing such technology, Harwick (2016) warned that blockchain technology is costly and time-consuming as it requires a change in all the levels of system development. Another cost associated with blockchain is that its cryptocurrency will be highly vulnerable to changes in the market. The world’s most popular and largest cryptocurrency, Bitcoin, is down about 16% in 2022 (YTD) so far. There are additional costs associated with blockchain such as transactional, storage-use, and “middleman” charges. (Kawasmi, Gyasi, & Dadd, 2019). Finally, studies found that blockchain results in high energy consumption levels (Bonson & Bendarova, 2019) as the algorithms involved in mining require high amounts of electricity and time, raising an environmental sustainability issue. In periods of high activity (as witnessed in 2021), Bitcoin mining burned more energy than the whole of Argentina, making it both expensive and an ecological disaster. Figure 1 shows The Cambridge Bitcoin Electricity Consumption Index (CBECI), a tool that shows how much electricity bitcoin spends.
Figure 1. Results of a study of Bitcoin electricity consumption by Cambridge Center for Alternative Finance, examining the increase in energy consumption of Bitcoin over the last 5 years.
Another dilemma facing this rising innovation is scalability, as blockchain has limited flexibility since it can’t be adopted by all organizations if it can’t stand the large number of transactions. As such, blockchain can only satisfy a limited number of transactions per second (Bonson & Bendarova, 2019). In addition, the “scalability trilemma” (p. 9), describes that the three characteristics: decentralization, security, and scalability can’t all be achieved at the same time (Kawasmi, Gyasi, & Dadd, 2019). Hence, this technical difficulty of blockchain will obscure its advancement in the future.
Another disadvantage that affects users, not just the institutions, is security. According to Bonson and Bendarova (2019), security breaches can place blockchain within 100% control of the perpetrator if they can manage more than 50% of its computational power. The 51% attack occurs when more than half of the network chain is at fault, misleading information to be thought of as truthful. Although block chain technology paves the way for reducing human errors and avoiding the “systematic duplication of efforts,” banks still resist the change as decentralizing their information and not being able to change pre-logged data due to immutability is risky for the business. These security risks are why organizations will hesitate to adopt the blockchain model.
Blockchain technology alarms financial institutions, governments, and end-users. Therefore, guidelines should be set before any adoption process of blockchain occurs, as the three adoption factors mentioned should not be overseen. Predicting the future is a confusing and challenging task, but one can be sure that blockchain will be a part of it and have a crucial role in society. As Don Tapscott, co-founder, and executive chairman of the Blockchain Research Institute, once said: “Blockchain represents the second era of the internet.”