The love-hate relationship between the banks the digital coins has been ongoing ever since the inception of Blockchain & the associated Cryptocurrencies. Let’s look at some stats first… according to the Research firm Greenwich Associates following facts were reported:
- The Financial services industry is spending $1.7 billion annually on Blockchain based distributed ledger technology
- Budget spending on Blockchain has shown an increase of 67% in the last year alone
- One in 10 firms have reported spending in excess of $10 million on Blockchain budgets
- Number of employees working on Blockchain projected doubled
And all this is happening for good many reasons since the advantages of adopting Blockchain are broad-based and not sector specific – namely Transparency, Lower costs, Efficiency, Improved Security & Traceability. Now all this is great to see since Blockchain is the technology of the future but this is the pretty part of the picture – since banks absolutely hate Cryptocurrencies. Before you get confused you should know that Blockchain is not the same thing as Crytocurrencies – Blockchain is simply a distributed hyper ledger on which Cryptocurrencies function.
While the banks have been more than willing to adopt the Blockchain based systems they have been less than willing to accept Cryptocurrencies as the medium of transaction on this hyper ledger for reasons we will look at a little later. Before that let’s look at some of the headlines of the past week:
Cryptocurrencies are an “environmental disaster” that could crash the global internet, a central bank advocacy has warned
Central bankers say cryptocurrencies could face ‘complete loss of value’
A panel of banking experts have rejected cryptocurrencies as too flawed, too short-sighted and too unstable to become workable fixtures in world monetary matters
Now you know why I used the word “hate”. The Bank of International Settlement (BIS – the bank of Central banks) came out with a harsh report taking a jab at the capacity & scaleability of Bitcoin & other Cryptos among other weaknesses. In short they think Cryptocurrencies are too volatile, unpredictable & uncontrollable! Let’s take a close look at why the banks really hate Cryptocurrencies:
- Decentralization: This is the core of what the CryptoCurrencies are based on where you don’t need to have a third part to validate your transaction & also no single authority has control over the whole process – this is exactly opposite of what banks do & they fear losing control over the money which they now have with the fiat based transaction system.
- Too big too Fast: The total Marketcap of the Cryptocurrencies at the time of this writing is hovering around $280 billion which has come down from an all time high of $835 billion at the beginning of the year when Bitcoin almost touch $20K. This of course made them bigger than the biggest bank in the U.S. – JP Morgan Chase. Banks are worried that Cryptos might overtake the traditional banking industry very quickly at this pace.
- New Technology: Everybody knows change is never easy & that too when you have something as revolutionary as the Cryptocurrencies. It has got the ability to cause a major paradigm shift in how we conduct business specially financial transactions. Since most of the bankers don’t know how this technology works or functions it makes them much less receptive to it.
- Compliance issues: Most of the Crytocurrency transactions take place in large amounts, they are difficult to trace & even more cumbersome to verify the source of such funds. This creates a compliance nightmare for the banks and their employees who are liable to report every nitty-gritty of a financial transaction.
- Job Losses: And finally since most people in the banking sector are used to their traditional way of conducting business – a new model based on Cryptocurrencies would disrupt the current system. Since Cryptocurrencies can work 24/7 without any intervening central authority with minimum transaction costs who would need brick & mortar banks where you get charged arm and leg for every little thing you do. No wonder bankers are getting edgy.
One thing is for sure Blockchain technology is getting adopted at a break neck pace & I believe Cryptocurrencies are going to follow suit – a lot of the these digital currencies might not survive & yes they have some issues to resolve before they get embedded in the main stream financial system but with every new technology there are challenges that eventually get resolved and so will these. It’s only a matter of time…
If like this article here are links to a couple of other articles that I wrote about similar issues – Central Banks & Crypto-currencies… a Love-Hate relationship & Crypto Armageddon or just another FUD?