Centralized vs Decentralized Banking

London’s old and new banking district. Bank in the foreground, Canary Wharf in the background to the right.

The recent article from Sam Patterson, “What are Decentralized Markets” hypothesizes that the future will be brighter where:

Decentralized markets allow people to engage in trade directly with each other. Instead of relying on the centrally-controlled servers of the companies, a decentralized market operates by employing its users’ own computers as the infrastructure”

In a discussion with New York Times journalist and author Nathaniel Popper (author of Digital Gold). We debated the merits and the future of decentralized markets vs human nature to gravitate towards centralized services.

The idea of decentralized services is not unique. In the early days of trading, people transacted directly without middlemen. Bakers bought wheat from farmers; cobblers bought leather from herders. As communities and distances between them grew, producers and manufacturers began to transact through middlemen and used centralized market places where producers and consumers were aggregated for efficiency. By doing so, producers could access more consumers, and consumers could access more producers.

In todays world new technology such as the Internet has made it easier for consumers to gain direct access the producers. Sam Patternson’s argument suggests that decentralised markets will become the norm. Will it?

A majority of the population is opportunistic in nature. This assumption leads me to the core of a centralization paradigm. Human nature craves efficiency and as a result, we tend to gravitate towards centralized services. Why? Centralized services offer simple and efficient ways of obtaining products and services in one place. These marketplaces end up providing high quality services due to specialization.

Here is a use case to think about. Planning a holiday abroad can be a complicated. Without using a holiday service provider, your plan of action is:

  • Purchase a flight
  • Book accommodation
  • Hire a car or organise transport

and if you do not speak the local language, these tasks can be even more difficult.

Expedia solves this use case exceptionally well. Its success is down to the very nature of ours; to find the most efficient way to organise our holiday. Aggregators such as Amazon, Ebay and even your local shopping center thrive because of this behaviour. They act as centralized marketplaces, providing consumers with a convenient place to get what they want. In addition, aggregators work on economies of scale and to increase their appeal, many provide value added services (such as free delivery or parking) and in many cases a lower cost. Everyone wins.

Proponents of Bitcoin suggest that some users will manage wallets on their own computer and effectively run their own bank. This is an idealistic view for some but will it become the norm for the rest of us?

What will the face of banking look like in the future? (Canary Wharf)

We use banks for three primary reasons.

  1. Security — Putting our hard earned cash under our pillow leaves us several dilemmas. If the house burns down or gets burgled, we lose everything. Having salaries paid into our bank accounts gives us the reassurance that we won’t get mugged on the way home on pay day. Can we trust ourselves with our own money?
  2. Efficiency — Banks provide us debit cards and credit cards (that nowadays are linked to payment networks such as Paypal, Visa, Mastercard — all aggregators). We can easily pay for services anytime, anywhere and on occasion cash out too. They also provide many additional services such as loans, funds and brokerage.
  3. Passive Income — We can get Interest return for storing cash. We make money without having to lift a finger. Imagine that — awesome! This is true added value.

If we did manage our own Bitcoin bank on our computers, would we be able manage all these three areas effectively? Can we consistently earn interest and a passive income using our own funds? Using Bitcoin will make it simpler, however, most of us would find someone or somewhere that is more qualified, has more experience and has more time in managing these services for us.

Whether you are organising a holiday or banking in Bitcoin, there are “centralized” services that make it more efficient to manage this for you. Will decentralised services be the norm? For some that may be, for the majority, it is unlikely.

Opinions expressed are the views of the writer Colin Kwan, CEO of Magnr. Colin has a background in IT and Investment Banking working for companies like UBS and Deutsche Bank. With 23 Years of experience in these industries he saw Bitcoin as means to improving efficiency and dramatically reducing the overall cost of Finance.


Colin is not a licensed financial advisor by the FCA in UK. Magnr and its associated products carry risk of loss. The reader should be aware of and observe all applicable laws and regulations of the jurisdiction you reside in.

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