Blockchain is transforming everything from payments transactions to how money is raised in the private market. Will the traditional banking industry embrace this technology or be replaced by it?
Blockchain technology has received a lot of attention over the last few years, propelling beyond the praise of niche Bitcoin fanatics and into the mainstream conversation of banking experts and investors.
Last September, JPMorgan Chase CEO Jamie Dimon took a stab at Bitcoin: “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.” Lloyd Blankfein, head of Goldman Sachs echoed that thought, saying, “Something that moves 20% [overnight] does not feel like a currency. It is a vehicle to perpetrate fraud.”
Despite the skepticism, the question of whether blockchain and decentralized ledge technology (DLT) will replace or revolutionize elements of the banking system remains.
And this very loud and public backlash against cryptocurrencies from banks begs another question: What do banks have to be afraid of?
The short answer is “a lot.”
Blockchain’s Role in Banking
Blockchain technology provides a way for untrusted parties to come to agreement on the state of a database, without using a middleman. By providing a ledger that nobody administers, a blockchain could provide specific financial services — like payments, or securitization — without using a middleman, like a bank.
Further, blockchain allows for the use of tools like “smart contracts,” which could potentially automate manual processes, from compliance and claims processing, to distributing the contents of a will.
For use cases that don’t need a high degree of decentralization — but could benefit from better coordination — blockchain’s cousin, “distributed ledger technology (DLT),” could help corporates establish better governance and standards around data sharing and collaboration.
With global banking currently a $134T industry, blockchain technology and DLT could disintermediate key services that banks provide, including:
1. Payments: By establishing a decentralized ledger for payments (e.g. Bitcoin), blockchain technology could facilitate faster payments at lower fees than banks.
2. Clearance and Settlement Systems: Distributed ledgers can reduce operational costs and bring us closer to real-time transactions between financial institutions.
3. Fundraising: Initial Coin Offerings (ICOs) are experimenting with a new model of financing that unbundles access to capital from traditional capital-raising services and firms
4. Securities: By tokenizing traditional securities such as stocks, bonds, and alternative assets — and placing them on public blockchains — blockchain technology could create more efficient, interoperable capital markets.
5. Loans and Credit: By removing the need for gatekeepers in the loan and credit industry, blockchain technology can make it more secure to borrow money and provide lower interest rates.
6. Trade Finance: By replacing the cumbersome, paper-heavy bills of lading process in the trade finance industry, blockchain technology can create more transparency, security, and trust among trade parties globally.