While blockchain has great potential, especially when it comes to banking, those around the hype must be practical. To say blockchain will be the end-all to big banking within the next five (or even ten) years is too hopeful and this is why:
- Blockchain must overcome the regulations hurdle. If institutions wish to use blockchain for lending and banking services in the United States, these institutions will have to be compliant with FINRA, FINCEN, AML/KYC rules, SEC regulations, and many other rules and regulations set forth for banking services. Recently, U.S. regulators from the Treasury Department's Financial Crimes Enforcement Network slapped Bitcoin-e, a virtual currency exchange, with a $110 million fine for facilitating ransomware, darknet drug sales, and other illicit activity using virtual currency. And while a bitcoin options exchange called LedgerX won approval from the Commodity Futures Trading Commission to clear bitcoin options, blockchain still has a long way to come before it is completely compliant with securities laws and regulations.
- Going international, especially when it comes to dealing with international settlements, is not easy. To have everyone working on a single or even a few blockchains to quickly clear the movement of assets and have them settle within minutes means every country, every institution, every regulator, and every exchange will have to agree to work on the blockchain. While it may be more homogeneous for domestic settlements as we rely on the Depository Trust & Clearing Corporation (DTCC) and Federal Reserve for settling, it is not so homogeneous internationally. The European Union can't even get everyone on board for the management of both monetary and fiscal policy which stifles the Euro and leads to the economic downfalls of participating countries in the Eurozone. If they can't even agree on this, this suggests the adaptation of blockchain technology still has a large hurdle it will need to jump over.
- Inputting economic value onto the blockchain is not as easy as we think. While crpytocurrencies rely on market supply and demand because they are capped at some amount of supply, they are liquid because you can exchange them for fiat currency. Until more vendors begin to accept cryptos and tokens as form of payment and consumers are actually confident in their value, the exchange of assets will prove difficult. If we exchange shares on the blockchain, i.e. you have a buyer and seller of shares, you need to know that those shares have some underlying value to them and that you can make them liquid. Until this is completely possible, the need for fiat currency will continue and that means the need for bank accounts, trusts, and other services supplied by big banking and the Fed will continue.
However, blockchain technology, though still nascent, will have a large disruptive effect as we move forward. As we look at how disruptive technology has been over the last 200 years, growing at an exponential rate, market analysts predict blockchain will grow much quicker than the internet. This means the possible entry of a firm like Amazon entering the market for blockchain technology and heavily disrupting big banking. Just as Amazon is killing the need for retail stores, we could see the same happen for banks in the future as blockchain technology continues to grow.