A lot of people have been saying how the blockchain is much bigger than Bitcoin itself, and they are right for the most part. Even though the Bitcoin protocol is powered by blockchain technology, the capabilities of distributed ledgers are not just linked to the digital currency ecosystem. A recent report by Citi seems to be thinking along those same lines, although most of their use cases are still focused on the financial aspect. This disruptive technology can change a lot of things as we know them today, that much is certain.
Some Institutions Gain from Blockchain Technology
Whenever a disruptive concept comes along, there are winners and losers. But things aren’t so black-and-white with blockchain technology in the picture, although there will be some fundamental changes along the way. Distributed ledgers offer far more advantages than downsides, but that does not mean there will be no casualties along the way.
Assuming this technology would be fully embraced by banks and financial institutions – through consortiums such as R3 CEV, most likely – the infrastructure being used today will undergo some necessary changes. With fewer – or no – intermediaries required, and real-time transaction processing capabilities, the entire infrastructure cost will be reduced, as there is far less overhead.
The Citi report mentions:
“Blockchain technology could be applied more broadly than crypto-currencies. In the currency space, the Bitcoin rail could be used to facilitate cross-border payments or supply chain and trade finance. Because virtually any type of information can be digitized and placed onto Blockchain, theoretically any information of value could be transferred in the Blockchain world. The programmability of Blockchain makes it suitable for smart contracts: a contract that executes once pre-agreed conditions are met.”
But at the same time, a fair few people in the financial industry will be out of a job. Since the middlemen are no longer needed, institutions such as clearing houses will become less popular, and eventually obsolete. That is unless they can diversify their business model, and become an oracle for blockchain transactions, of sorts. Moreover, a blockchain in the banking sector will still require counterparties at the beginning, which is a role suited for clearing houses.
The same cannot be said for custodian banks, however, as their primary role is to handle receipt and delivery of cash and securities under the current infrastructure. Once transactions are settled in real-time, however, there is very little point in paying a fee for a service that is not a necessity anymore. But there is an opportunity for custodian banks too, as they are the ones driving blockchain adoption in the traditional financial industry.
Perhaps the biggest “winners” in the world of blockchain technology are investment banks. Not only can they massively reduce operational costs, but they would also be able to free up capital as the balance sheets are reduced in size. Neither of these factors is an immediate game-changer, though, but they are two prospects to take into account.
It has to be said, however, that none of the established financial players are talking about Bitcoin itself. While it is certainly true blockchain technology extends far beyond the Bitcoin ecosystem, the main reason this concept has become so appealing to banks is due to Bitcoin itself. Consumers have a growing demand for new financial solutions, and banks are scrambling to cater to their needs. But they will never be able to recreate the total financial freedom Bitcoin is offering.