Blockchain Will Make Banking More Efficient, Not Replace It
Originally Posted on August 13, 2016, by Todd Harris on
CUToday.info
Blockchain technology is quickly emerging as a way for companies to make and verify transactions almost instantaneously — without a central authority. For financial institutions, blockchain technology promises to cut costs and lower risk of fraud by providing a secure way to digitally track asset ownership. It’s also the technology behind bitcoin.
The lack of a central governing authority and the vast potential of blockchain technology has led some to speculate that the “era” of banking and how it works, could be nearing its end — with cryptocurrency taking its place.
A Slow Transition
In my view, the impact of blockchain won’t be quite so dramatic, or at the very least, the transition will take place slowly, over decades. The declaration of disintermediation of federally insured depository institutions is premature. Make no mistake — blockchain will disrupt traditional financial institutions. However, financial institutions that adapt to and embrace this new technology (rather than clinging to traditional transaction-type models) will benefit from these advances. These include reduced fraud, lower costs, and most importantly a faster, more secure transaction platform for members/customers.
The home video market and its disruption over the last decade provide a model similar to what banking may be facing. At one point, you had competitors like Blockbuster, Hollywood Video and Netflix — all vying for the same market. Digital infrastructure improved to the point where video streaming was the norm. Netflix embraced this new opportunity; Blockbuster and Hollywood Video did not. Today, there are many competitors in the streaming space, while those who didn’t adapt are gone. This same type of scenario will play out (more slowly) with financial institutions and blockchain technology.
Anonymity is what attracts many to blockchain (bitcoin), but it’s also a weakness when viewed by central banks and governments. Ultimately, it will hinder bitcoin or other anonymous cryptocurrencies from becoming a significant part of the market.
What's Next?
What’s next for blockchain and cryptocurrencies? It’s possible that central banks either individually or collectively will create managed blockchain networks for their member institutions. These could retain the advantages of blockchain, while still allowing central banks to peer through the veil of anonymity that currently exists with bitcoin. Although this development might be viewed as undesirable by bitcoin users, it would nonetheless allow consumers (on a large scale) to realize the benefits of blockchain technology. Eliminating anonymity is a priority for governments due to the need to manage commerce and trade, levy taxes and fight illegal activities like crime and terrorism. Governments can’t do this effectively with anonymous cryptocurrencies.
American consumers also place a high value on deposit insurance, which protects an individual’s assets up to $250,000 per depositor in the event an institution fails or is otherwise not able to meet withdrawal obligations. By staying with a sovereign currency and traditional institution, consumers retain this benefit — something a cryptocurrency cannot provide.
Todd Harris is the CEO and President of Tech CU, San Jose, Calif.