Does Blockchain Pose a Threat to Banks?
‘Blockchain vs traditional banks’ has been the topic of harsh debate since crypto first became big news. From the outside, the situation is typical for such issues: two irreconcilable enemies, barking at each other non-stop, without the slightest possibility that either look at things from a rational viewpoint.
But, as usual, the entities around which the whole argument revolves are actually getting along with one another pretty well. How come? The thing is that the blockchain/banks relationship is complex and cannot be treated as a matter of one replacing the other. Rather, this is a gradually evolving merger with many different aspects — some of which we consider below.
Defining your terms
There is blockchain, and there are cryptocurrencies. They are not the same thing and mean something quite different, despite being closely related. Most those who advocate the ‘blockchain-will-kill-banks’ position don’t know the difference. Cryptocurrencies are forms of tokenized money distributed via a decentralized ledger (blockchain). Blockchain won’t kill banks, because it is a technology that anyone can use and integrate into their product for their own advantage. That is just what many banks are already doing. For example, Japanese and Korean banks are testing blockchain systems for payments and transactions. Spanish bank Santander has estimated the savings of banks using blockchain at $20 billion a year.
But why are banks doing this in the first place? Like other centralized systems, banks are facing certain problems: scalability, throughput, security and speed issues. Eventually, they won’t be able to process the data correctly and on time. Blockchain is an obvious solution. We’ve already talked about how blockchain will influence business: the banks of the future will become centralized businesses, with an existing structure, that utilize co-developed/outsourced blockchain instruments. While remaining centralized in structure, they will alter their business and management schemes by implementing blockchain solutions, exclusively designed for the company’s needs.
As far as existing cryptocurrencies are concerned, there’s a competition between them and the banks, but a reasonable one. The banks realize cryptocurrencies are here to stay. Banks have no other option but to build a bridge to cryptocurrency networks, since the interests of customers will inevitably prevail. This process will go slowly (approximately 10 to 15 years) but will intensify after most of the banking world has switched to blockchain solutions. That is a good thing both for users and businesses because banks and cryptocurrencies will become more and more tied to one another through seamless connections.
You’ll be able to choose between P2P-payments and traditional banking, which already won’t be traditional since the banks are gradually adopting blockchain solutions. Again, it is important to underline that the banks are not developing cryptocurrencies and running ICOs (though some are making serious attempts in that direction). Reasonable banks are adopting a technology that is totally coinless, or with coins meant for utility use only. Banks simply seek decentralized blockchain solutions to improve their services, increase security levels and slash operational costs.
Yet some banks are now developing their own ‘public’ cryptocurrencies. Why? To some bankers, crypto looks attractive simply for the juicy market caps, which make them drool all over their white collars. But in the end, it is very unlikely that branded cryptocurrencies, meaning bank-issued equity tokens, will become a consideration. You have to put an enormous effort into developing a high-quality new form of digitized money on the blockchain that will truly stand out. Even now most large corporations that adopt blockchain solutions are hiring contractors for the purpose, and these solutions are more about speed and throughput than the creation of new tokenized money. Then, there’s the fundamentally different philosophy behind banks, which do not seek “financial anarchy” — and that is what cryptocurrencies represent for die-hard bankers. They find blockchain attractive for its practical applications, and they might even tolerate crypto like BTC or ETH, but they will never allow the ethics of cryptocurrencies (in their popular understanding) into their world.
Finally, the nature of banking has nothing to do with equity tokens. It’s like ICO issuers who say they need a token just because they want to, even though there’s no need for one. Some say a cryptocurrency owned by a bank will attract more customers who don’t want to open an account, but that notion is false since the whole process of opening a bank account will be swift and smooth thanks to the implementation of identity authentication on the blockchain. Really smart banks do want to be up-to-date and technologically advanced, but they also don’t want to play games in which all good seats are already taken. That will simply lead to a huge waste of money and time.
Any phenomenon has its nuances, and you have to pick the features that are good for you whilst excluding those that are useless. That’s what clever bankers are doing. For instance, six large banks have teamed up to create an internal cryptocurrency — a utility settlement coin — to settle transactions between each other faster and more securely. It is fundamentally different from what CitiBank is trying to do in its attempts to create a crypto product for popular demand. Others are not inventing anything new, simply going with existing solutions, offered, for example, by Ripple. Time will tell which decision is more efficient and viable: building decentralized systems from the ground up or implementing ready-made solutions.
What the future holds
There are obvious trends emerging now, which will intensify in the future:
- Development of more seamless connections between crypto and banks.
- Adoption of blockchain solutions by banks that will improve their services, reduce operational costs, and play a huge role in building connections with cryptocurrency systems like Waves, Bitcoin, etc.
- The two processes above will lead to improved legislation and supervision (for example, right now The Bank of England, the U.K.’s central banking authority, is developing a proof-of-concept (PoC) examining how to maintain privacy over a distributed ledger-based network while still allowing regulatory overview of the data).
- Attempts by banks to create branded cryptocurrencies of their own, aimed at competing with already established and widely recognized crypto, will eventually fade. Fewer banks will use their own equity tokens.