A recent study by Bain & Company describes blockchain as a potentially revolutionary technology for banking services. This view flies in the face of a recent report from the De Nederlandsche Bank (DNB) and musings from the Bank of Canada’s funds management and banking department.
Unlike the central banks, Bain sees blockchain as creating efficiency that could slash some transaction costs by up to 80%, which would make early adopters extremely competitive among their peers. The study from the consultancy focused on transaction banking revenues, which are a less volatile form of earnings for banks than other areas of operation.
From their report: “Using this technology, execution, clearing and settlement could occur simultaneously, minimizing liquidity and credit risks. Custody and other post-trade security services also are under threat from new technologies.”
Bain isn’t alone in praising the potential for Blockchain in the private sector and joins many other consultants and companies who are looking at how blockchain could create efficiency and transparency.
Transaction banking is an excellent use for blockchain because, unlike centralized ledgers, there is no need for multiple parties to settle a trade. Let’s say that someone wants to buy a product online. Using the current system, a consumer would need to pay electronically, and the merchant has to clear the trade with the buyer’s payment method.
Even if by some miracle the seller and buyer use the same bank, they would still need the services of a fourth party – the payment processor. Blockchain could all but eliminate this level of complexity and all the fees that go along with it.
Instead of using a bank, a buyer, a payment processor, a seller, and a second bank, blockchain could create a three-party trade. This removes complexity from the structure and also the potential for fees and delays.
If the client used cryptocurrency to pay, and the seller used a bank that was crypto friendly, the transaction could be made with three parties, in near real time. Of course, if the seller didn’t want to use a bank, it could be a true two-party digital transaction, though that could be a bridge too far for the time being.
Regardless of how the settlement is achieved, it should be clear that the position taken by the above mentioned central banks is open to debate. The complexity that has developed in the modern financial economy isn’t a source of efficiency and can lead to unnecessary expenses for everyone involved.
Blockchain is a very new idea, and it will take time to find the best ways to implement it as a settlement architecture. As the report from Bain phrased it, blockchain has the potential to cut costs in transactional banking “if adopted in the right way by participants in the trade ecosystem.”
In addition to using blockchain architecture that may not have been ideal for replacing existing systems in their tests, central banks have a vested interest in maintaining control over the monetary system. Decentralization is an obvious threat to their financial hegemony and an ability to direct economic policy.
A clear conflict of interest may or may not influence central banks’ opinions on blockchain technology.
Nicholas Say was born in Ann Arbor, Michigan. He has traveled extensively, lived in Uruguay for many years, and currently resides in the Far East. His writing can be found all over the web, with special emphasis placed on realistic development, and the next generation of human technology.