Some commentators have described cryptocoins such as bitcoin as a fraud, Ponzi scheme, or a bubble ready to burst. J.P Morgan Chase CEO,Jamie Dimon, said last September that bitcoin was worse than the tulip bulb craze and that it would not end well with someone being killed.
Unlike traditional assets such as stocks, there seems no objective way of determining the value of cryptocoins just the market price, and that is extremely volatile, a regular roller coaster market filled with speculators and no doubt manipulators as well.
Another negative observer Lloyd Blankfein, head of Goldman Sachs also noted that something that moves up or down 20 percent in price in a short time does not seem like a currency but a vehicle to perpetuate fraud.
At the same time, many companies see the value of blockchain technology. The International Securities Association found that 55 percent of companies polled are monitoring, researching, or even developing solutions based on blockchain technology.
Likewise many in the cryptocurrency field see traditional financial features as being replaced by cryptocurrency and the blockchain while many others such as Ripple see their platforms as designed to help financial institutions solve their problems.
Five ways blockchain technology could disrupt traditional financial institutions
A
long article at CB Insights discusses five areas in which the blockchain technology will disrupt traditional operations of the financial system.
The five are: payments, clearance and settlement systems, fundraising, securities, loans and credit.
The entire articles is well worth reading. This article will just discuss the payments system as an example.
The Payments system
Trillions of dollars travel around the world in an antiquated system characterized by slow payments and many added fees.
As an example, if you live in San Francisco and want to send money to your family in London UK you could end up paying a flat fee of $25 dollars for a wire and additional fees up to 7 percent. Everyone gets a cut, including your bank and you are charged a hidden exchange rate fee. The bank may not even register the transaction for a week.
This costly inefficient system is profitable for banks but expensive and slow for users. Cross-border transactions, from payments to letters of credit created 40 percent of global payments transactional revenues in 2016.
Blockchain technology will offer a payment system with higher security and lower costs as a way of sending peer-to-peer(P2P) payments and will require no intermediary. There is no need for third parties to verify transactions. The new technology will give people access to cheap, fast, and borderless payments.
While bitcoin is experiencing problems of scale as its use expands it still easily beats the average 3-day time period for processing bank wire transfers. Bitcoin transfers take half an hour up to 16 hours to go through. Coins such as Bitcoin Cash and Litecoin are even much faster, and cheaper. Bitcoin Cash transactions cost about 20 cents each.
Bitcoin transactions rose 118 percent in 2016 alone although much traffic was the result of speculative trading.
BitPesa
BitPesa is a blockchain company that concentrates upon facilitating bank to bank (B2B) transfers in countries such as Kenya, Nigeria and Uganda. It has monthly trade volumes of $10 million. It charges a fee of only 3 per cent compared to the average cross-border payment to Kenya of 9.2 percent.
BitPay
BitPay is a bitcoin payment service that helps merchants accept and store bitcoin payments. Just within the past year, it has grown in volume by a whopping 328 percent and gives merchants more than $110 million per month. BitPay charges just one percent per transaction compared to fees of 2 to 3 percent for credit card transactions.
The antiquated
infrastructure of clearance and settlements is also bound to be reformed by blockchain technology.
The future
It will take some time for the new technologies to disrupt the existing system. Much of the new technology is just in the experimental stage but a number of financial institutions are willing to try out the new technology. It appears unlikely that the blockchain technology will replace the existing system.
It is more likely that the new technology will supplement or reform the existing system. While the old system provided a larger profit margin many institutions will no doubt feel that they will gain more customers by adopting blockchain systems since the new technology is quicker and cheaper. Those who resist the new technology may find that their services are less and less in demand and that they actually are losing to those adopting the new technology.
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