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The
head of a recently created unit at the Central Bank of Russia devoted
to exploring financial technologies sees a wide-reaching role for
blockchain use in finance, according to a recent interview.
Translated statements from an interview between Russian-language publication
Bankir.ru
and Vadim Kalukhov, director of the Russian central bank’s Financial
Technology, Projects and Process Management Department, paint a portrait
of cautious enthusiasm for the technology, a stance consistent with
past statements from the institution.
The Central Bank of Russia, which
earlier this year
made public its plans to study blockchain applications in finance and
elsewhere, sees a possible role for the technology in payments, document
certification and more.
Of note from the interview was an effective pushback against suggestions that the Russian central bank
was weighing the issuance of its own digital currency.
If it did, the central bank wouldn’t be alone in its potential
pursuit. The Bank of England, the UK’s central bank, has thus far
emerged as a strong voice of support blockchain technology, as well as a
potential issuer of a
national digital currency. As reported last month by
Business Insider,
BoE governor Mark Carney is set to deliver a speech later this month
that is expected to focus on applications of the technology.
Kalukhov indicated that the Bank of Russia is, at least for now,
keeping its head down on the issue, saying that the matter is under
active discussion by central bank officials.
He explained in the interview:
"We have to admit that digital currency issue is still on
the agenda. We see that community’s interest has shifted from private
digital currencies to national ones,” he said. “So far regulators
worldwide, including us, are only saying that the matter is being
studied, and don’t give any comments as for either the terms of
creating, or ways of operation or coverage."
This comes as companies within the Russian private sector, most notably payments processor QIWI,
pushes ahead with plans to upgrade its payments database structure with a blockchain.
In the interview, Kalukhov offered his take on recent developments
within the country as they relate to blockchain tech, indicating that
the central bank wants to see domestic startups experiment and
collaborate on possible applications and that it "is so important to
create communication sites, technology garages, [and] finance technology
hubs” to foster this kind of environment.
Regulators ‘support’ adoption
According to Kalukhov, who joined the central bank as deputy chief
information officer in February 2015, there is support for blockchain
tech among the world’s regulatory bodies, but that engagement varies
from country to country.
"Regulators support its adoption to a variable extent: some countries
just don’t have enough technology companies, desire to do this or
interest to the technology," he said.
Kalukhov went on to say that the Russian central bank, among others,
sees the benefits in the reduction of transaction costs. He further
indicated that the Bank of Russia is keeping a close eye on technology
developments, calling it a "key interest as the regulator".
He said in the interview:
"As most financial market participants, we share the hope
that blockchain will allow to reduce overall transaction costs. If the
technology allows to save cash spent on overall transaction costs, then
we, as the regulator, are interested in it, since this will ease the
overall burden for the population."
"We are especially interested and keeping an eye on any prototypes
designed to reduce specific overheads for end users," he added.
Kalukhov was also firm that there is no existing ban on the technology.
This statement comes
amid a push
within Russia to institute a ban on so-called money surrogates which
would include bitcoin and other digital currencies, and effort
that began in 2014.
Kalukhov suggested that the central bank is currently taking a
wait-and-see approach to its own rulemaking process, suggesting that,
for now, the technology doesn’t pose any immediate risks that warrant
attention.
"The blockchain technology is allowed to be used in the territory of
the Russian Federation. So far, deployment of prototype Russian
companies launch doesn’t cause any difficulties. If we see that some
regulations are needed to enable the technology development, we will
think over how to do this," he said.
Support for group efforts
During the interview, Kalukhov indicated that the Russian central
bank views group efforts by both technology and non-technology
companies to test and develop new systems as positive developments,
saying that such initiatives work to the advantage of both sides.
He noted that these efforts are already happening in Russia. "Such
partnerships are established, and we are glad they are," he said.
In the last year and a half, a range of consortium efforts have emerged globally.
These include the 40-plus banking consortium led by startup R3CEV,
the Post-Trade Distributed Ledger Group spearheaded by a number European
financial institutions and securities exchanges, and recent
private-public collaborations established in Japan. The Hyperledger
Project, overseen by the Linux Foundation, has also brought together a
range of technology and financial firms.
Kalukhov said that for technology firms, it’s a practical matter of
either pitching in on a group effort or take the risk of offering a
competing product of its own. For financial companies, he said, there’s
little need for the technology if participants aren’t coming together.
"As I have already mentioned, no one needs blockchain only for
itself, because the matter of creating field of confidence within one
company does not arise," he said. "So, if you want to work with
blockchain, you have to find somebody, and it’s better [for there to] be
more than one party."
Varied applications
Kalukhov highlighted a number of applications throughout the
interview, notably suggesting its use for verifying that individuals
have genuine power of attorney when trying to access funds. With the
right legal document, someone could claim that they have the ability to
executive transaction.
The issue: those documents might not be legitimate. But having a
mechanism by which greater confidence in the veracity of legal
documentation could give banks more confidence when weighing whether to
greenlight those kinds of transactions.
"Every time someone offers access to your account with a letter of
attorney, a bank should make sure that the letter of attorney is
genuine," he explained. "It’s not always easy to do: a bank has no right
to refuse the transaction, unless there are suspicions that the letter
of attorney is not genuine. All this may change, if a single reliable
database will be created."
However, he went on to say that he believes creating shared document databases might not be as practical at a larger scale.
"Even the best idea, if needed to be spread over more than several
thousand users, often turns in a very long story that lasts years and
years," he said.
Kalukhov would again invoke the idea of building confidence between
entities through shared ledgers, saying it could be applied to any kind
of financial messaging or payment.
"Blockchain may offer an advantage to companies, when there are
multiple participants, and they are separate legal entities that have to
resolve a matter of confidence," he said. "And the parties to the
transaction are in two different credit institutions or any other two
organizations that are financial market participants, these need not
necessarily be banks."
Another notable application, he said, was the use of of the
technology for real estate registers, which he said don’t trigger the
same kinds of privacy concerns raised by financial firms.
"...I see promising perspectives in migrating registers to the
blockchain technology, such as cadastral register, real estate register,
because they are initially open. And it means, all confidentiality and
data security issues are eliminated, as well as the need of redundant
encryption," he said.
Kalukhov also offered his take on distributed ledger applications for
securities trading, saying that there would need to be established
legal accords governing activity before any benefits could be reaped.
He said in the interview:
"To make securities transactions blockchain work,
registrars should come to an agreement. They will have to agree upon
migration to the distributed register, single storage standards and on
how they will exchange data and enter records. This is the only way for
them to obtain any added value from the blockchain."
Barriers remain
From Kalukhov’s perspective, there are a number of barriers hindering adoption within the Russian finance sector.
The first, he said, had to do with the speed of transactions and how
different parties to a hypothetical blockchain would operate in an
environment where transactions are being sent at high speeds.
"If network nodes are physically too remote from each other, it can
take quite a long time to synchronize the database," he said. "And until
databases have been synchronized and agreed, there is a risk of the
so-called double spending. The point is, how fast the system can start
the second transaction after committing and confirming the first one."
He highlighted data privacy as another area in which the Russian central bank sees as a pain point.
"If you store the register, there are two options. You see everything
the register includes or register data are encrypted, and you see only
your data, and don’t see anybody else’s," Kalukhov explained. "And here
the problem arises: if you have the entire register, then encryption
stability is measured with the time needed to overcome the protection."
He went on to say that additional encryption layers would alleviate
these concerns, but that questions of cost, access and the speed at
which transactions would occur remain.
Perhaps most vitally, Kalukhov said that the combination of these operational factors itself is an issue.
"The third barrier is existence of such combination of factors, under
which system operation will be considerably impaired or will become
impossible for some time," he said. "This is the issue many parties are
trying to resolve now. It is equally burning for both open and closed
systems."
He went on to offer a critique of private blockchains, saying that they “do not resolve the issue of confidence”.
"The risks are mitigated, but still exist," said Kalukhov.
"Confidence must be enough, so that even in the closed network the data
volume distributed between the participants would not put their
commercial interests at risk."
He later returned to the question of privacy, explaining:
"The key risk is data confidentiality loss. Next, it is
the system stability risk, the risk of compromising the system.
Confidentiality is the blockchain bottleneck, and this is what
cryptographers work at."
Ultimately, Kalukhov seemed to frame how the technology finds
adoption through the lens of which technology uses emerge, both from
what exists today and what other solutions are developed within Russia
and abroad.
Criticizing services that aren’t forthright about the extent to which
they use distributed systems – "I object against such double-talk", he
said – Kalukhov struck a supportive note for the development taking
place today.
He said:
"It’s very important for prototypes to prove their right
to life, and after this, technical implementations of more or less
commercial scale might be developed."
Image Credit: Popova Valeriya / Shutterstock.com
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