Will the Bitfinex hack affect any move to trading using blockchain?

"If I gave you a 10-dollar bill, and then asked you how do we clear and settle that payment," said Adam Ludwin, from Chain, in an interview with Time Magazine, You would look at me funny, because it doesn’t make sense.”

It has been suggested that blockchain technology, the most well-known version of which is bitcoin, may transform high frequency trading, because at the moment there is a disconnect between trading and clearing and settlement. Looking at the capital markets, high frequency trading is possible, but the system for clearing and settlement is far from fast. So the trade may be completed in fractions of seconds but the payment may take up to three days.

Blockchain may change this, as high frequency traders can ‘trade the payment’. Mr Ludwin explained further, he said: “If we can put currency into a native digital format, instead of sending an electronic message, we can send the assets themselves electronically. The difference is what these cryptographic databases known as blockchains bring to the world. If we can do that, if we can send the assets themselves as opposed to just sending messages, then I can pay a supplier in Vietnam as fast as I can send an email to Vietnam.”

The same idea can be applied to high frequency trading. As Mr Ludwin said: “When people say blockchain technology will change clearing and settlement, what that really means is that blockchain technology will make clearing and settlement redundant.”

According to a survey carried among 500 financial services companies, and conducted by Marketforce on behalf of Pegasystems Inc. and Cognizan, no less than 60 per cent of financial services retailers who had some understanding of blockchain technology said they thought it was the most significant technology since the internet. Yet the same survey found that 35 per cent of respondents said they had never heard of blockchain.

One of the core ideas behind blockchain is that it uses a distributed ledger, in which a record of every transaction ever carried out using a particular application of blockchain is stored on every computer employed in the process. So to hack into the system, you need to hack into potentially millions of computers, simultaneously.

Despite this, on August 2, The Hong Kong based Bitcoin exchange Bitfinex was hacked into, with the reported loss of around $70 million of bitcoins. It wasn’t the distributed ledger that was hacked into, rather it was the keys to the ledger that many users choose to store at exchanges, to save themselves hassle. It is not clear, however, how hackers were able to break into the Bitfinex exchange as it uses a system of multi-signatures to access an account.

So will the hack impact on the popularity of blockchain and reduce its appeal?

It’s important to bear in mind that bitcoins are just one version of blockchain.

A recent report produced by Credit Suisse concluded that Bitcoin faces an uphill struggle to gain acceptance, and while distributed ledgers may prove to be more significant, blockchain poses little threat to the payments sector.

Yet a recent report by the Bank of England, by John Barrdear and Michael Kumhof, suggested than the Bank of England may introduce a blockchain style distributed ledger into the financial system to compete with retail banks.

Such a move might prove to be highly disruptive to retail banking, but for high frequency trading, the result may be a revolution in the speed of payment.