R3’s Tim Swanson: A Public Blockchain Has Settlement Risks

By April 8, 2016Bitcoin Business

Are public blockchains really a viable option for guaranteeing settlement finality for financial instruments?

Tim Swanson, director of market research at R3 , claims public blockchains by design cannot definitively guarantee settlement finality. For this reason, he says they are not presently a reliable option for clearing and settling financial instruments.

Swanson aired his views on tabbforum in response to the view among some crypto enthusiasts and investors who see public blockchains as a settlement mechanism for financial instruments.

Swanson claims they ignore the regulatory, legal and commercial requirements and regulations concerning the need for definitive settlement finality. The Need For Finality

The European Commission’s directive 98/26/EC was motivated by the need to minimize systemic risk by ensuring any payment considered final according to the system rules was, in fact, final, even in insolvency proceedings.

Minus definitive finality, one participant’s insolvency could undermine transactions considered settled and unleash a host of liquidity and credit problems for other participants in the payment system.

By ensuring definitive settlement, finality creates trust in the system and minimizes risk. Hence, it is one of the most critical concepts in payments, one that applies to all settlement and clearing systems such as bulk SEPA clearing system STEP2 and high-value payment system Target2.

Cyrpto proponents think immutability is unique to public blockchains, Swanson noted. But strong, one-way cryptographic hashing gives immutability to any data it is hashed by. If a person changes one part of a transaction, the hash changes and another person knows it has changed. Proof-Of-Work’s Role Proof-of-work that many blockchains use gives a way to vote on the inclusion and ordering of transactions in a block in an environment where one does not know who is voting. If one knows who votes, there is no need for proof-of-work.Hence, proof-of-work-based blockchains like bitcoin offer no way to predict […]

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