Cryptocurrencies, banks and payment services provide unprecedented access to your money and allow you to send it to anyone, in different ways and against different fees.
Unlike banks and payment service providers, crypto is a currency and a payment network at the same time. The British pound is a currency, PayPal is a payment network, Bitcoin is both.
Someone states that, when using the bank system or payment service providers, the money is somehow protected or, at least, more protected than in the cryptos do. In many cases, this is not correct in any true understanding of the word. The number of data breaches and, in some cases, the difficulties in getting refunds should lead to consider the ‘traditional’ system as a much less secure and guaranteed system than you might believe.
In the European context, the Deposit guarantee schemes reimburse a limited amount to compensate depositors whose bank has failed. Anyway, it must be remembered that there’s not a fund immediately available for those depositors and that the monetary claim is always limited to a certain amount.
Even when a refund is given, it is clear that the reimbursements are just fractions of the revenue of the paying company, which is a different way to refer to the cost their customers pay for each transaction.
Bitcoin was a ‘bank-killer’ from the start, so the hatred the digital asset initially elicited from financial industry leaders wasn’t shocking at all.
Predictably, this ostracism didn’t stop the cryptocurrencies so the ‘traditional’ financial system started wondering how it could capitalise on this relentless technology.
JPMorgan Chase has its blockchain division (pompously named ‘Blockchain Centre of Excellence’). Dozens of other banks and financial institutions are developing similar projects to introduce the DLT to their business models.
We must be honest: the technical hurdles that currently come with peer-to-peer transactions can be prohibitive. This obstacle, together with a lack of knowledge, lead many people to sacrifice some autonomy with their money for the simplicity that comes with keeping it in a bank.
It’s for these reasons that the most significant impact that, in the short-run, the blockchain will have on the banking and financial sector is by improving process efficiencies. The long-awaited modernisation of how information is stored, processed and shared may be close.
Both businesses and consumers will benefit from such a strategic change, thanks to access to faster and cheaper processes.
The key-function of banks is to be the most secure custodian of your money and act as a trusted middle-man for transactions. The blockchain jeopardises their role. The more decentralised entities gain popularity, the more direct transactions and investments can be made, the more banks have to change their skin.
‘Adapt or die’ is an inherent truth for the financial systems, now much more than in the past.
This article was originally published in “Blockchain Compliance Bulletin”, number 7.