The banking system has evolved over the centuries, adapting to its time. Since the beginning of the banking system, estimated to be around the renaissance period, incremental changes in the system have been implemented leading to the modern banking system that we know today. Now with the emergence of new technologies such as Bitcoin and blockchain technology, the banking system is again facing a new challenge, and on the verge of transformation. So are Bitcoin and blockchain a threat or an opportunity for the mainstream banking? We will argue that at least blockchain technology can be incorporated into the mainstream banking system without entirely disrupting it.
Bitcoin (the system) and Blockchain Management Systems (BMS) in general are a system for transferring numerical values from one account to another, such that no value is lost in transit between accounts, and double-spending is impossible[1]. A blockchain is essentially a distributed database that takes a number of records and puts them in a block. Each block is then ‘chained’ to the next block, using a cryptographic signature. This allows block chains to be used like a ledger, which can be shared and corroborated by anyone with the appropriate permissions[2]. This system enhances transparency, but also efficiency by for example rendering clearing houses redundant as the software handles that task autonomously and flawlessly.
It is understandable that such a system would interest the mainstream banking system, as incorporating it can yield great results. As a matter of fact, big banks are almost unanimously in favor of blockchain, and are actively conducting research and trials using the technology. Most however seem wary of bitcoins. Indeed, the recent outburst of JPMorgan Chase CEO Jamie Dimon at an investor conference where he vehemently attacked bitcoins is an illustration. On the other hand, there is a Blockchain Center of Excellence within JPMorgan which “leads efforts for applications of distributed ledger technology (DLT)”, indicating the company’s penchant for the technology.
Banks and financial intermediaries in general enable reductions in transaction costs and information costs[3]. With the integration of a system like blockchain, there is a great opportunity for the mainstream banking system to reduce even further transaction costs. At the same time, a blockchain based system enables near real-time payments. For example, Ripple[4], which is a system that has some similarities to Bitcoin’s, is being used by banks to conduct cross border trading. This allows banks to instantly settle cross-border payments, saving them time and money.
Although incorporating bitcoins into the mainstream banking system seems difficult, we can definitely say that blockchain can be incorporated into the system. Truth be told, the current banking system probably does not have a choice but to incorporate a Blockchain Management System, or face extinction.
