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Will banks be replaced by blockchain technology?

jbronkhorst

Imagine you didn’t need to trust a stranger to make a deal with them.
Imagine you didn’t need to trust your bank to deposit your money there.
Imagine you didn’t need to trust your government to know it was being just and fair.

What would happen?

It would change the world.

This is precisely the promise of blockchains

These are the opening statements from the article Blockchain: the revolution we're not ready for. And although I do not like to imagine that we shouldn't trust each other anymore (we'll get into a war zone...), I do appreciate the idea that blockchain will change the world. The million dollar question however is HOW? Let's take a closer look at the believers who think the impact will be tremendous and the non-believers who slow down the impact.

The believers

blockchain2.jpgMy exploration begins with Industry analyst Gartner who indicates in the 2017 top trends for emerging technologies that blockchain has hit the peak of its hype cycle, which implies that a lot of rubbish is being written and said about blockchain. At the same time they warn that "ignorance is dangerous" as this technology is expected to mature and cause both dramatic as well as sudden changes that will radically reshape economic systems, institutions and societal models that have existed for hundreds of years. In other words, Gartner believes this technology will lead to a reformation of whole industries. So my conclusion is that also Gartner believes that blockchain will change the world. Unfortunately they do not indicate how a blockchain enabled future state would look like (no vision) and only describe what they see their customers are doing.

Other people are expressing extreme opinions to underline the potential revolutionary impact of blockchain technology. For example Andrey Sharov, Vice President of Sberbank - Russia’s biggest bank by assets and the third largest bank in Europe (2014 figures) - said at the Metro Expo 2016 event that blockchain technology will see banks disappear by 2026. More specifically he stated:

In 10 years, I fear that banks will not be around and I will have nowhere to go to work. Now, there are peer-to-peer lending platforms and those developing payment systems, based on blockchain technology.

And he is not the only one making this type of statement. Already in October 2015, Florian Graillot wrote in an article that for the first time in history, the technology seems to be able to replace institutions. To substantiate this statement he describes a number of blockchain related startups that cover a wide range of potential use cases all focused on easing and reducing the cost of transactions. He also refers to famous VC investors, like Marc Andreessen, who compare blockchain to previous tech revolutions: “Personal computers in 1975, the Internet in 1993 and Bitcoin in 2014.”

A year later, in October 2016, Haley McDowell weighs up the winners and losers of blockchain technology and suggests the financial services industry is about to undergo a mass clear out. She describes several cases in which blockchain could possibly replace current centralised business models in the financial sector. These cases include clearing, settlement, reconciliation, post trade, custody as well as asset management trading, managing and overseeing funds on behalf of investors. Disintermediation and automation of tasks are mentioned as the main reasons why blockchain technology is replacing people and companies to lower costs, improve transparency and reduce the overall complexity of financial transactions.

More specifically, various articles have been written on the question whether the SWIFT network for inter-bank payments will be replaced by blockchain technology. While SWIFT exists for over forty years and nowadays connects more than  9,000 financial institutions around the globe, its interbank messaging and exchange system is considered to be old-fashioned and needs a major upgrade. Initially the discussion around this topic was centered around the question whether SWIFT will be replaced by blockchain. More recent articles consider this a given and focus on how this will be realized: Will the SWIFT network be replaced by a blockchain-based one e.g. Ripple? Will SWIFT cooperate with Ripple or will SWIFT create a complete new blockchain network of their own?  Or are there other alternatives? While it is still unclear how exactly this will unfold, the increasing amount of SWIFT hacks are expected to accelerate the transition to blockchain-based cross border payments.

The slow and non-believers

brokenchain-free-images-at-clker-com-vector-clip-art-online-BJU2Dn-clipart.jpgMost banks initially showed skepticism towards bitcoin and blockchain-enabled currency as this was seen as an attempt to build an alternative system of money beyond the control of governments and central banks. Although bankers distrusted the bitcoin concept, the blockchain technology underpinning it was seen as having a number of useful features. Hence the banks started to explore the potential of blockchain technology for other processes. But as blockchain is a really disruptive development, banks still have a lot of fear concerning this technology because, in the pure theory of blockchain, a lot of processes within a traditional bank would be obsolete.

Brock Pierce, the chairman of the Bitcoin Foundation, said in an April 2016 interview with CNBC that while the adoption of blockchain will hit parts of a bank, it will ultimately create opportunity (and not kill banks). With this interview Pierce also reacted to Andrey Sharov's (extreme) standpoint mentioned earlier in this article. More specifically Brock Pierce said:

There are certain aspects of banks that are going to be negatively impacted, but there are also going to be other business units that are going to be positively impacted and new business units that get created that might not even exist today. And the parts of the industry that are being most negatively impacted are the ones where the bank is not providing much in the way of value, where they are being a toll taker but not really a value creator.

Despite the opportunity, banks find blockchain hard to put into practice as there are many problems to overcome. For example a shared system for executing transactions, if built like bitcoin, could allow rival banks to spy on each other’s activities. Additionally, making such a database immutable raises the possibility that fat-finger trades, where an additional zero is accidentally inserted into a transaction, for example, could not be reversed, resulting in the potential for unexpected losses. There are also questions of scalability: if data are replicated across all the banks using a shared settlement system — the bitcoin model — it potentially becomes too cumbersome.

So it became clear that banks do not want to use the technology as originally intended, i.e. with a a focus on decentralisation and anonymity. Instead banks have taken control over their own blockchains, and decide who can use their versions of the distributed ledger. It will not be public, it will be private. This approach eliminates the benefits of decentralisation and an open, low-fee payment network, but ultimately makes the innovative technology adhere to the norms of the banking world. As a result these private blockchains could reduce operating costs for the global banking industry substantially and reduce the threat of eventual disintermediation.

Will banks will be replaced by blockchain technology? So far I did not find any evidence to believe that banks will actually disappear, however it is undoubtedly crunch time. Blockchain has the potential to be transformative, however it's not (only) about technology itself, but especially about people to see the technology for what is it and take advantage of it.

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Jeroen Bronkhorst
Account Chief Technologist (Financial Services Industry)
Hewlett Packard Enterprise

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About the Author

jbronkhorst

Jeroen has 26+ years of experience within the IT industry. From an industry perspective he spent 7 years in Government (Defense), 12 years cross-industry and 7 years in Financial Services Industry. In terms of skills, he spent 10 years in IT Consulting, 6 years in Portfolio and Program Mgmt and 10+ years in Strategy and Innovation. Geographcally he worked 10 years within the Netherlands and 16+ years Internationally.

Comments
Alfredo Ferreiro

Jeroen, really interesting post. I fully agree with your statement about it isn't only a technology challenge... The people behavior and their adoption pace will be the key.

jbronkhorst

Thanks Alfredo. You may also want to read the article: Why Blockchain Doesn't Matter.

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