One of the less-discussed features of digital currencies are how they can help existing financial institutions. In the crypto world, we like to talk more about how Bitcoin and others enable us to have no need of the banks. More recently, there has been a…
In the crypto world, we like to talk more about how Bitcoin and others enable us to have no need of the banks. More recently, there has been a lot of buzz around how the real winner of the cryptocurrency movement has been the revolution of block chain technology, the decentralized ledger which underpins Bitcoin and others and is integral to its function. Without the block chain, there is nothing special about Bitcoin, and without bitcoins, say many, there is no incentive to utilize the block chain.
However, opacity and centralization have long been a problem for private banking institutions. You float $5 billion to another bank and a year later you have no idea if they actually have the reserves to repay you. A huge contributing factor to the financial crisis, in fact, was opacity. Not to mention credit default swaps, sub-prime mortgages, and lots of other fancy words for really bad deal.
A new report by Emmett Rennick of Oliver Wyman, a consultancy group with a heavy focus on the financial industry, says a number of very important things about how banks can make use of technology brought about by the Bitcoin revolution. For one thing, and this will be no surprise to our regular readers, many major companies are already investigating the use of the block chain.
Commercial banks, central banks, stock exchanges and major technology providers, such as IBM and Samsung, are all exploring the potential uses of distributed ledgers. Fintechs, such as Ripple, Ethereum, Eris Industries and HyperLedger, are also developing new ways to exchange data and assets enabled by the technology. It is only a matter of time before distributed ledgers become a trusted alternative for managing large volumes of transactions.
For another, block chain technology can help securities traders cut costs, by not relying on centralize clearing houses to confirm trades. But this is not all the technology can offer, according to the report. It can also boost investor confidence in the securities they are buying.
Distributed ledgers can increase investor confidence in products whose underlying assets are now opaque (such as securitisations) or where property rights are made uncertain by the role of central authorities. […] Our analysis suggests that distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022.
Not to mention that regulators will have better, easier access to the books of large financial institutions, which will reduce headache for both parties. Obviously, with institutional banking, the question is not whether to regulate, but how, when, and what to regulate. By using a transparent, public ledger, the incentive to act badly can also be reduced as well as the ability of the government to regulate such bad activity.
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Banking and most of the technology it relies on was born in an era before every home and business had networked computers. It was designed pre-Internet, and largely out of necessity. Bitcoin was born in an era of serious financial chaos, when huge interests were acting like children with massive amounts of money.
More importantly, Bitcoin was born on the Internet. It is not a promise of anything, like traditional bank notes, but an actual expression of value. You either have it or you don’t. Banks making use of this technology would both reduce their cost of business and increase the level of trust in that business by other parties. Revolution is a big word, but for bankers, block chain technology can truly enact one.
Last modified: January 25, 2020 11:05 PM UTC