Blockchain is a somewhat abstract technology that many are indirectly familiar with. Over the past years, cryptocurrencies such as Bitcoin and Ethereum (Plus500, 2021), have exploded to mainstream trading popularity, and the technology behind it is Blockchain. Before diving into the technology’s potential as a disruptor in the banking sector, a brief explanation is warranted. Simplified, Blockchain is a network of devices habitually conferring at intervals to agree on the truthfulness of the information they hold (Church, 2017).
Imagine two parties trying to buy and sell a house respectively. They agree to a deal and record their transaction on the Blockchain via a device. This information is communicated to all devices, known as nodes, in the network. Ensuing, a new ‘block’ is added to the chain, and the transaction is successfully recorded in the decentralized system. One may attempt to hack the blockchain and alter the transaction, but this is nearly impossible as incorrect nodes are discarded from the decentralized network at every interval, making the technology nearly unhackable (Xu, 2016).
Blockchain has the potential to drastically alter the traditional banking system in numerous ways, including payments, securities, trading, and data security. First and perhaps foremost, Blockchain eradicates the need for a middleman in payments. Currently, payments go through banks because they hold the party’s money and can verify details. Cryptocurrencies like bitcoin can be thought of as digitized cash, which can be transferred directly between parties. This process is massively better than the traditional model as it is cheaper, because banks take a big cut, and it is faster, taking only about 10 minutes as opposed to the days it can take for a bank to process the transaction (CB insights, 2021).
Similarly, and as alluded to in the example, Blockchain enables the secure digitalized recording of assets, cutting out third parties looking for commissions and also improving security. Imagine a Chilean farmer who manages to record his land on a recognized worldwide blockchain. Even if his corrupt government decides to reward a politician by altering the paper contract stating that the land belongs to the farmer, the farmer can prove that it is not. Although this might not solve his problems immediately, he can eternally show that the land belongs to him because the records are immutable (Lin & Liao, 2017).
Lastly, Blockchain can cut out brokers such as deGiro and Trading212. A public Blockchain enables everyday investors to directly trade equities with each other, thus foregoing potential waiting times and commissions (CB insights, 2021). Additionally, the security of the technology means that these investors can actually hold their favorite equities themselves, rather than having their brokers hold them in their name.
In conclusion, the operationalization of Blockchain has the potential to drastically alter the banking industry in the upcoming period, by increasing security, cutting down commissions and giving transparency to the people. Despite this, Blockchain has problems it will need to overcome before being able to truly disrupt, including scalability, energy consumption, and efficiency challenges (Iredale, 2020).
Sources:
CB Insights. (2021, July 1). How Blockchain Could Disrupt Banking. CB Insights Research. https://www.cbinsights.com/research/blockchain-disrupting-banking/#payments
Church, Z. (2017, May 25). Blockchain, explained. MIT Sloan. https://mitsloan.mit.edu/ideas-made-to-matter/blockchain-explained
Iredale, G. (2020, April 17). Top Disadvantages of Blockchain Technology. 101 Blockchains. https://101blockchains.com/disadvantages-of-blockchain/
Plus500. (2021). What Are the Most Traded Cryptocurrencies? | Plus500. Plus 500. https://www.plus500.com/en-NL/Trading/CryptoCurrencies/What-are-the-Most-Traded-Cryptocurrencies%7E2
Xu, J. J. (2016). Are blockchains immune to all malicious attacks? Financial Innovation, 2(1). https://doi.org/10.1186/s40854-016-0046-5
Lin, I.-C & Liao, T.-C. (2017). A survey of blockchain security issues and challenges. International Journal of Network Security. 19. 653-659. 10.6633/IJNS.201709.19(5).01.
