The Huffington Post asks “How Will Blockchain Change Banking? How Won’t It?” Regrettably the answers are meaningless in that it offers a wish list that is unfettered by technical, regulatory or business realities. This article suggests that blockchain will disrupt existing markets for authentication, payments, savings, loans, exchanges, venture capital, insurance, and accounting functions predicated on all of the startup activity:
“Blockchain entrepreneurs and incumbents alike are working to resolve the limitations of the antiquated financial system by using blockchain technology to devise new ways to perform the eight core functions of financial intermediaries.
Authentication of identity and reputation
Today we rely on rating agencies, financial data analytics firms, and retail and wholesale banks to establish trust, verify identity in a transaction and decide who merits access to the system. In contrast, reputation accrues on the blockchain itself. Blockchain technology lowers and sometimes eliminates the need for trust altogether in certain transactions.
Payment card networks and money transfer services solve the double-spend problem, making sure that no dollar is spent twice as it moves from one person to another. The blockchain can do this by consensus for the movement of anything of value — currencies, stocks, bonds and titles — of any size or distance, dramatically reducing friction and democratizing economic growth and prosperity.
Retail and investment banks, brokerage houses, and asset management firms are the repositories of value. The average Joe uses a safe deposit box or a savings or checking account. Large institutions use so-called risk-free investments such as money market funds or Treasury bills. The blockchain can replicate all these instruments peer-to-peer.
Retail, commercial and mercantile banks along with credit scoring and rating firms facilitate the issuance of credit card debt, mortgages, corporate and municipal bonds, T-bills, and asset-backed securities. On the blockchain, anyone could check creditworthiness before issuing, trading and settling traditional debt instruments directly, reducing friction and increasing transparency. The unbanked and entrepreneurs everywhere could access loans from peers.
Trading is the exchange of financial instruments for the purpose of investing, speculating, hedging and arbitraging. It includes post-trade clearing and settling. Blockchain cuts settlement times on transactions from days or weeks to minutes or seconds. This efficiency creates opportunities for the unbanked to participate in wealth creation.
Venture capital and investment
Investing in an asset or enterprise gives individuals the opportunity to earn a return, be it capital appreciation, dividends, interest or rent. Raising money normally requires investment bankers, venture capitalists and lawyers to name a few. Blockchain technology automates the matchmaking, enabling more efficient, transparent and secure models for peer-to-peer financing, recording dividends and paying coupons.
Insurance and risk management
Risk managers attempt to protect individuals and companies from uncertain loss or catastrophe not just through insurance but through myriad derivatives meant to hedge against unpredictable or uncontrollable events. Blockchain supports decentralized models for insurance, making the use of derivatives far more transparent. Using reputational systems based on a person’s social and economic capital and online behavior, insurers will have a more meaningful picture of the actuarial risk.
Accounting is the systematic recording and reporting of financial transactions. It is a multibillion-dollar industry controlled by four massive audit firms. Yet traditional accounting practices are not keeping pace with the velocity and complexity of modern finance. The blockchain’s distributed ledger will make auditing transparent and in real time and enable regulators to more easily scrutinize financial actions within a corporation.”
This fails to take into account the fact that current activity is, at best, a technology pilot and that some implementers, including the R3 consortium of banks, have recognized that blockchain technology is inappropriate for the applications they wish to bring to market. Mercator expects the impact of blockchain technology on financial services will be far less broad than currently surmised by venture capitalists and startups.
What blockchain has accomplished, however, is important. Business leaders now recognize that cooperation and transparency within an industry can be transformative. Mercator’s opinion is that this is true no matter how that cooperation and transparency is delivered. In most instances we expect it will be accomplished using cooperatives that have a legal standing and more traditional technology that has already proven secure and manageable in the cloud. While blockchain technology will find its niche, it is not likely to displace regulated entities that governments hold accountable when things go terribly wrong.
Overview by Tim Sloane, VP, Payment Innovation at Mercator Advisory Group
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