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Blockchain – Friend or Foe?

Mar 16, 2016
Financial Institutions

I recently attended a summit dedicated to the topic of blockchain technology. Prior to attending, I had heard of blockchain but didn’t really know what it was all about. While some of the summit was a bit Pollyanna-ish, it broadened my perspective to blockchain’s potential applications. Let me share some of my takeaways and try to open your mind to the potential applications of this technology.

In theory, blockchain technology has the potential to do to capital (primarily through the payments system) what the Internet did to communication; it can totally change the medium. Media outlets, telecommunications companies, etc. are still around, but the way they deliver their products has materially changed.

Without getting technical (mostly because I can’t!), transactions based on blockchain technology are the closest digital representation to transacting in cash that the banking world has seen thus far; it is instantaneous and permanent. It doesn’t matter if you are next door to the counterparty or across the world. Also, the transaction is (virtually) impossible to hack, so it drastically reduces cybersecurity risks.

Some of you may have heard about, read about, and maybe even done some research on Bitcoin. I did, and I wasn’t impressed. Neither, really, were some of the presenters at the summit. Bitcoin is one fairly narrow, branded application of blockchain technology. Blockchain’s potential goes far beyond Bitcoin. At the conference, I was sitting next to a man from the U.S. Department of the Treasury, and every large bank was represented. In fact, there is a consortium of over 40 banks called R3 (R3CEV LLC) that is actively researching and developing ways to use blockchain technology. R3 recently executed a transaction using a system based on blockchain.

Where do I see this going? I do not see this replacing the business of traditional community banking. Some financial intermediaries are in trouble. Let’s assume for a moment that blockchain technology takes off. If you are in the payments business, you might be in trouble; at the very least you will need to be an early adopter and completely retool. If you are a money services business (MSB), you are in trouble and likely need an entirely new business plan. But community banking is about relationships, exercising judgment in allocating capital, and managing risks. Blockchain will not change those core value-added functions. Blockchain could, however, change the “plumbing” of the financial system.

What you think about blockchain? With regard to banking, do you see blockchain as a threat, an opportunity, a passing fad…something else? What are your thoughts? 


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