By James Lawrence - Knowledge - 4 months ago

Banking and Blockchain

Blockchains implications to our society will be wide reaching, as discussed in a previous article, but within perhaps the most obviously affected, most suited to benefit and most likely to be disrupted by blockchain, is our current system of banking. Blockchain circumnavigates middlemen, allowing payments to be made online without the need of banks, it was designed to disrupt banks. The possibilities of blockchain also serve to benefit and optimise banking if timely and correct implementation takes place by banking providers.

Under current conditions there exists as vicious cycle for the unbanked, to be able to take loans one needs a credit rating, but without a history of loans one does not have a credit rating, it’s the classic ‘five years of experience for an entry level position’ dilema. Financial exclusion is the inability for individuals to have access to necessary financial services of credit and loans, secure deposits, transactions and insurance. Right now, around the world, it is estimated around 2.5 billion live like this. While it takes huge investments for traditional financial institutions to bring these services to emerging markets, blockchain requires only digital infrastructure, mitigating huge costs. Blockchain looks to be foundational in economic progress and revolutionary in finance. ID2020 is an ongoing project supported by the United Nations, their aim is to provide “a digital identity that puts the individual at the center [that] can provide political, economic and social opportunity.” The ID2020 project highlights identity as a human right and a gateway to economic opportunity. Blockchain has potential to bypass traditional banking services to provide a greater level of economic equality to those excluded by contemporary services, a completely new foundation of banking abilities.

Recently I read a fantastic article by Billy Silva, where he debates the place of blockchain as a disruptive or foundational innovation to banking. Providing banking to the unbanked is an example of blockchain as a foundational innovation to finance. When it comes to disruptive capabilities of blockchain, one just have to examine the roles of banks in our society. The services banks provide as our designated protectors and allocators of wealth are fairly simple; value transfer (payments), value storage (deposits), value provision (lending and investing) and value protection (derivatives and insurance) plus advice on these four pillars. Value transfer, or payments, globally accounts for $1.7 trillion USD of banks revenue, this represents 40% of total banking revenue. Let’s examine transfers within the traditional banking system, say I wanted to transfer $100 from my Georgian bank account to my mother in Australia. This would probably take two or three days, if it’s not the weekend or there aren’t any public holidays and depending on transfer fees and exchange rates, my bank would charge me around 10% for using their services. Now let’s say I transfer the money using bitcoin right now, my mother would receive the money within 10-20 minutes, an hour maximum, and it was cost less than a dollar to transfer. Blockchain also has the ability to interrupt banks value storage capabilities. Cryptocurrencies, such as Bitcoin and Ethereum, with peer-to-peer networks can be used as value storage tools. ICOs are proving to be a new model for value provision, raising money quicker and with less fees than traditional financial loans. Finally blockchain technologies make derivatives more transparent, reduces settlement times and associated fees.

The abilities of blockchain are a pretty obvious threat to current lumbering and expensive financial institutions, (imagine just implications of blockchain undermining the staggering figure quoted above) but banks are also most suited to benefit from blockchain technologies.

In their seminal article, The Truth About Blockchain, Harvard researchers Marco Iansiti and Karim Lakhani describe blockchain as a foundational technology as opposed to a disruptive one. Iansiti and Lakhani believe the depth of transformation to traditional economic models will mean a completely new reality for banking. Currently banks and financial institutions are at the early stages of adoption of blockchain technologies within their systems, but the implementation is widespread, with nine out of ten banking executives saying their banks are looking into blockchain. Currently, the most prevalent uses of blockchain banks are studying involve intra-bank cross-border transfers. Ripple is a cryptocurrency that received over $55 million of funding from banks across the globe focusses on this issue. Ripple claims to be able to reduced costs associated with these transfers by over 33% and perform them in seconds. Ripple sets itself apart from a majority of cryptos as it wants to work alongside of banks and governments to improve services of these already established institutions.

Many financial institutions are adapting blockchain to a multitude of procedures. Currently two of the biggest banks in the world, AIG and Standard Chartered, are developing a blockchain based pilot project to deliver multinational insurance more efficiently. The project, powered by IBM, aims to employ two key pillars of both insurance and blockchain, trust and transparency, to better accommodate insurers and the companies they insure. Utilizing smart contracts to automatically set contractual conditions based on applied data across the network means all parties throughout all nations can rapidly and simultaneously view and understand contracts.

While AIG and Standard Chartered look to use blockchain to streamline operations, The Central Bank of Argentina (Banco Central de la Republica) has turned its attention to blockchain technology in a bid to fight rising national inflation rates. Additionally The China Economic Times, reported on July 23 the former vice president of North American investment banking at JPMorgan Chase saying that blockchain “may be the key to avoiding the next global financial crisis."

Whether disruptive, foundational or revolutionary, banks will be required to undergo unprecedented changes in coming years due to blockchain. While there may never be a world without large financial institutions, it’s also feasible that a much more democratized system of economy will be available. Banks are trying to play catch up and begin leveraging the power of blockchain to streamline services and not be left behind the revolutionary wave already beginning.