Why Financial Institutions Don’t Like Bitcoin Blockchain, a Research Report Tells You

Although Bitcoin is unlikely to completely replace the dollar anytime soon, blockchain technology, which financial institutions have invested a lot of resources in, is definitely a major trend. Just like Morgan Guaranty Trust Company, startups in this field have received a lot of financial support from banks. Goldman Sachs has made it clear that the technology has the power to cause upheaval: "Although the Bitcoin hype storm has subsided, Silicon Valley and Wall Street are betting that the technology behind Bitcoin, blockchain, can change...everything."

However, after all the hype has passed, financial institutions will have to address several legal or compliance issues if they want to use Bitcoin blockchain technology as a replacement for current financial infrastructure.

安吉拉瓦尔希assistant professor at the School of Law at Saint Mary's University, recently wrote a research report that explored a series of problems that banks and other financial institutions may face if they switch to virtual distributed ledgers based on the Bitcoin blockchain. He said that although the infrastructure of the existing financial system is outdated and needs to be upgraded, any infrastructure that can replace the existing financial system should be absolutely reliable.

"But the benefit of bitcoin blockchain technology is that it makes us realize how important a reliable financial market infrastructure is and makes it clear that alternatives to existing financial market infrastructure must be reliable," Walsh said.

Walsh said that once financial institutions use blockchain or distributed ledgers instead of third-party signing services, if they also switch to virtual ledgers like the Bitcoin blockchain, they may face complex legal and compliance issues.

According to Walsh, some of the fundamental characteristics of the Bitcoin blockchain, including the status of the software, its decentralized structure and its open source software development process, pose potential risks to financial institutions' management.

The upgrade process of Bitcoin blockchain

Walsh said the Bitcoin blockchain, like any other software, is vulnerable to vulnerabilities. In addition, blockchain software is constantly changing and updated with new versions, which can cause network disputes and lead to splits or forks.

“The nature of software that evolves over time through new versions is probably more of a problem for the decentralized bitcoin network than it is for centralized financial market infrastructure,” Walsh said.

“As new versions of the bitcoin software are controversial, network adoption can be spotty, like intermittent splits that can only be created when consensus among the various parties is reached. Like the March 2013 split, it undermined the reliability of the bitcoin blockchain.”

The decentralized structure of the Bitcoin blockchain

Walsh said that the decentralized structure of the Bitcoin blockchain means that it has no formal organization or official body to operate, and is not legally bound by any entity or organization, which poses potential major risks to financial institutions.

“The existing centralized financial market infrastructure at least clearly defines who is responsible for its management and maintenance, and who is responsible if risks arise,” Walsh said. “The functional maintenance of financial market infrastructure is very important. If there is no department specifically responsible for implementing the blockchain, there will be great risks.”

Bitcoin’s open source software development process

Walsh said that similar to the decentralized structure of the Bitcoin blockchain, the development process of its open source software is also the same. Everyone participates in the development and maintenance of the software, but no one is legally obligated to do so.

"If there is a crisis in the operation or value of Bitcoin, there is no financial system or payment expert to intervene to deal with the crisis," Walsh said. "I think it is necessary to involve people who have a deep understanding of the world's financial and monetary systems and let them participate in the operation of the Bitcoin network. Financial market infrastructure functions for the convenience of all users. If it stops working, user-specific payment systems or central bill clearinghouses will be paralyzed."

Even if banks and other financial institutions are able to solve some of these operational issues by creating private blockchains and hiring software programmers to keep the systems running, Walsh said the question of fiduciary responsibility will always come into play.

Original text: https://bitcoinmagazine.com/articles/angela-walch-risk-factors-to-consider-before-replacing-existing-financial-infrastructure-with-bitcoin-blockchain-technology-1459279325
By John Camdir
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Source (translation): Babbitt Information (http://www.8btc.com/angela-walch-risk-factors)