The central bank of the Netherlands (De Nederlandsche Bank, or DNB) announced today that after three years spent developing four different distributed ledger prototypes, the technology is not ready to meet the demands of large financial market infrastructures (FMIs).
DNB concluded that DLT is neither sufficiently scalable nor energy efficient, and that its transaction verification is not unquestionable. However, the institution acknowledged DLT's ability to improve security against hackers.
According to DNB's bulletin:
"The blockchain solutions tested show that they are not sufficiently efficient, with regard to costs and energy consumption, and they can not handle the large numbers of transactions. Moreover, with some ... consensus algorithms, the 100% certainty is never achieved that a transaction can not be reversed."
The first step in DNB's research was the creation of a decentralized token named Dukatons. The first prototype was based on the Bitcoin PoW model, but energy costs proved too much of a burden.
The second prototype ditched the Bitcoin model for a trusted (unnamed) third party that created all the tokens in advance, but validators only received transaction fees while the third party kept the actual tokens.
For iteration number three, DNB decided to create its own digital wallet for the storage of encryption keys. This laid the foundation for the fourth prototype, which allowed the DNB to test whether DLT was able to fulfill the high demands of an FMI. The bank determined it could not.
DNB said it has not given up on DLT, and it will continue researching and learning about appropriate applications.
DNB is not the first bank to look into DLT. In September 2017, Bank of America Merrill Lynch promoted the use of blockchain for trade finance. In May of this year, Infosys, a global business consulting firm, partnered with seven banks in India to create a blockchain-based trade finance network.