No, Yves Mersch, the ECB’s System Is Not ‘Better’ Than the Blockchain
It’s misleading to say that TIPS is faster, since there are numerous blockchains. Blockchain offers the kind of security that TIPS couldn’t really provide.
It’s no secret that central banks aren’t exactly the biggest fans of cryptocurrency. On Thursday, the European Central Bank’s (ECB) Yves Mersch provided further confirmation of their disdain. But was he right?
In an interview with Bloomberg Merch declared that the ECB’s new TARGET Instant Payment Settlement (TIPS) system is ‘better’ than the blockchain.
He highlighted the greater speed of the Bank’s new system, which is due to “commence operations” in November 2018. “TIPS is 10 seconds, 0.2 cents,” he said. “DLT [Distributed Ledger Technology – blockchain is one type of a distributed ledger.] transactions are at best 30 euros and take at least one hour.”
Mersch was asked whether the ECB might ever consider using a blockchain-based system instead of the incoming TIPS, which will allow European banks and customers to transfer money in real time. He replied, “Why would we abandon TIPS? We have a mandate for efficient payment systems, and we go for efficiency.”
While it’s not controversial to argue that blockchains are potentially disruptive in legal and governmental terms (as Mersch also does), it’s highly debatable as to whether speed and cheapness alone make TIPS ‘better’ than the blockchain.
In fact, according to blockchain analyst (and founder of the Digiconomist blog) Alex de Vries, it’s misleading to say that TIPS is faster than ‘the’ blockchain, since there are numerous blockchains in operation and under development. “Mersch is talking about the Bitcoin blockchain,” he explains. “Ethereum is already much faster (15 seconds) and much cheaper to use.”
De Vries also points out that the comparison between the ECB’s TIPS system and the blockchain isn’t a particularly appropriate or meaningful one, since the two technologies are fundamentally dissimilar. “TIPS isn’t a blockchain or distributed ledger, so it seems to offer little change other than being faster that the old system,” he states.
De Vries adds that it was already common knowledge that centralised systems such as TIPS are more efficient than blockchains. Yet because they’re centralised, “You also get the “single point of failures” that go along with that,” he says. “It’s true that a side-effect of blockchain is that transactions aren’t settled immediately, but this isn’t the main purpose of blockchain technology (and definitely not for the Bitcoin blockchain). The latter mainly offers a distributed and immutable single source of truth. TIPS isn’t competing with that in any way.”
Steve Davies, global blockchain leader at PricewaterhouseCoopers, one of the Big Four auditors, also emphasises that distributed ledgers offer the kind of security that a centralised system such as TIPS couldn’t really provide.
“If you look at some of the [blockchain-based] platforms used to manage payments today, then, yes, they will be slower … that’s because the way that the cryptography works on these blockchain systems is that it’s designed to be difficult in order to enhance the security.”
Such strengths of the blockchain underline how, contrary to Mersch’s insinuation that TIPS is ‘better,’ the TIPS system and distributed ledgers aren’t really comparable. Yet even though Davies concedes that older blockchains are generally slower than the ECB’s new settlement system, progress is being made all the time in developing distributed ledgers that are secure, distributed and fast.
“And even over the last 12 months we’ve seen advances in this,” he says, “and I think what we’re going to end up seeing is a series of developments over the next couple of years where we’ll be able to get both speed and security at the same time.”