McKinsey Digs Deeper Into Blockchain Technology Adoption Challenges

The global financial sector is gradually opening up to blockchain – the decentralized public ledger that powers the bitcoin. The technology has potential applications much beyond the digital currency – it can track the exchange of anything else that carries value such as stocks, bonds, securities and much more.

In a recent report titled, "Beyond the Hype: Blockchains in Capital Markets", McKinsey & Company identifies the challenges inherent in the blockchain technology.

Firstly, there is no provision to directly amend transactions after the fact on the blockchain; instead, a second, opposing and correcting transaction must be recorded. For this McKinsey proposes a new way which requires network participants to agree on recourse mechanisms that can be pre-programmed.

Secondly, the “finality of settlement” for a digital asset may require revolutionary legal and regulatory work – McKinsey says that the developmental design of such digital assets requires consensus among all parties on standard terms and digital descriptors, and the transaction model and all specific transaction terms must be agreed upon ahead of time.

McKinsey also points out that full digitization is not possible for certain hard assets and therefore some blockchain applications will need to synchronize the digital ledger with the physical world.

Also, the existing blockchain has no scope for margin finance, and instead checks for possession of assets before transfer is permitted. However, McKinsey said that to this end modifications are being proposed by blockchain tech companies.

McKinsey also pointed out several other challenges including slower confirmation (about 10 minutes) despite faster settlement; hard 1 megabyte limit on the block size of the Bitcoin blockchain and requirement of substantial computing power which raises concerns for energy consumption.

Moreover, the application of the blockchain technology is likely to impact data, risk, capital and pricing models. McKinsey says that making appropriate changes to those models along with obtaining regulatory approvals is likely to be costly, with benefits expected over time.