Blockchain and a problem of contract settlement

Given some interest my previous blockchain writeup produced https://goo.gl/3kc2Eu , I'd like to share some more thoughts on the subject.

One of the arguments for things like Bitcoin goes as far as presenting it as a settlement tool for cross-institutional and cross-border trade (both financial and real).

Explanation usually goes like this "since making wire-transfer is expensive (costs like $30 dollars per retail transfer) and it takes a couple of days to reach destination accounts (depending on number of intermediaries) it's interesting to settle using blockchain since it's cheaper/faster". Well, cheaper/faster needs to be proven outside of the lab, but let's say it's all true. Usually you also see some garbage about decentralization of money transfers and other things as if it makes things cheaper or faster or even more reliable. It usually doesn't, but people are being spoon-fed this decentralization stuff all the time.

Now have you ever thought why transferring money is complicated/slow and more expensive than you want it to be?

As far as I can say, there are multiple reasons for that among which are the following:

• Low competition in the market. SWIFT is basically dominant player here. Historically it managed to navigate through all the national differences and regulations as well as legacy banking tech and has certain network effects which secure its position. Think of it like Facebook of money transfers (which owns Instagram as well). So your real options is some Twitter having 280 characters limit and that's the niche other players can play, but it's really hard to challenge SWIFT in its core market.
• Heavy regulation. Every layer of modern banking is regulated heavily. Before your money ends up being transferred source bank does due-diligence. Government does capital controls, intermediary bank does due-diligence and so on. It costs money. It is work to comply. And the cost is transferred to customer.

Now, people say blockchain and de-centralization is going to change all that. But how? Ok, I understand the extra competition part, which is not bad at all. I am all for it. Even though I bet it's much harder for reasons SWIFT/banking hasn't been seeing much competition. So, once you start competing with centralized platforms which comply with regulations, you have to comply as well. For instance... make transactions reversible under some legal framework. Implement some anti-money-laundering on block-chain... Make some interface for capital controls, etc.

Doing all the stuff centralized system does (see above) in decentralized fashion is usually more difficult, not less. It is also quite fragile to new legal requirements instituted for some players in the market.

Let's say Tunis passes a law that any Bitcoin transaction made without reporting it to government is illegal and punished with 20 years in jail. Well, Bitcoin people will likely say "fuck that" instead of complying. Okay, but some people in Tunis might not want to sit for 20 years behind bars just to make a point. If you want to avoid regulations you not only do it without involving a government, you have to abolish a government first. You can remove some regulations, but blockchain doesn't do it by itself.

Now, while blockchain can be used for something in the realm of settlement, it by itself doesn't create more competition and doesn't remove regulations. So it cannot make settlement any cheaper.

When it comes to processing speed, I bet many things with existing technology can be done relatively fast once a good pattern of business is established with volume of transactions. For instance, with stock trading you don't need to care all that much how hard settlement is, it just works behind the scenes.

What I mean by that is: if I walk into a random bank branch and ask to make a transfer to some exotic country from my account which I've never done before, there will be a lot of friction in the system. If I make million of such transactions I can negotiate with the bank to lower my fees and simplify the process enough to make it easy and cheap.

Can a set of banks with work with each other set up settlement protocol on blockchain? Absolutely. But benefits of doing so have to do with the fact that counterparties there are known, regulated and trusted to a good extent.

It takes a little thinking to understand where costs come from in real life. Blockchain may be a part of an answer for some one the challenges, but it's nowhere close to be a silver bullet solving all the problems.