The banking sector is an ancient one with prototype banks identified as early as 2000 BC in Babylon and Assyria, but they have also been partly responsible for a lot of economic blunders in recent years – from the 2008 recession caused by subprime lending to the EU currency crisis caused by irresponsible loan practices.
Could it be the long, historical monopoly over financial services by the banking sector is now ripe for disruption by smart contracts and digital currencies using a technology called blockchain?
According to Kevin Dherman, Chief Innovation Officer at global ERP provider SYSPRO, “Traditional banking structures are based on a guarantee of your money’s safety and security in return for often rising service fees, but times are changing when technology through cryptography can promise financial security with faster service and cheaper service costs.”
“Smart Contracts are digital protocols that allow parties to execute contractual agreements without a third party – in the case of financial transactions, for example, payments can be made without a central authority such as a bank. How this is achieved is through blockchain, a technology that uses cryptographic software to create a peer-to-peer network where transactions are verified by every node on the network, creating a fault-tolerant way of handling tasks.”
Business Benefits of Smart Contracts and Digital Currencies
Smart Contracts and digital currency could have a huge impact on an area of the economy that currently can’t be tapped by the banking industry (it has been estimated by the World Bank that half of the world’s adult population do not have bank accounts).
The recent boom in the smart phone industry in areas such as Africa and Asia is creating huge opportunity for smart contracts and digital currency to access this market. Imagine for a moment being able to simply sign up to a digital currency account, and immediately start transacting without using a card or having to withdraw cash from an ATM.
Dherman says, “If you’re a business owner it gets even better. Not having to deal with merchant accounts, or any overhead associated with business banking, and being able to accept payments immediately by simply using your digital currency wallet address. If this technology could be integrated with your ERP and other business software the benefits could be enormous.”
It may mean that payments are cheaper, with transfer fees and banking fees eliminated, since the blockchain protocol used by any given digital currency would be its own infrastructure, negating the need for an intermediary such as a bank to facilitate – and profit from – transactions.
It may also mean there would be no currency exchange issues in the form of fluctuating exchange rates across countries as digital currencies do not fluctuate in value like nation state currencies.
Transactions done in for example, General Ledger, Journals, etc. would be redundant as these programs would be obsolete because blockchain uses transactions as part of the protocol.
This would also make point-of-sale much easier since banks would not need to be involved, only a working internet connection and a bitcoin address would be necessary to transact.
Fraudsters will also find themselves with far fewer opportunities to exploit thanks to the cryptographic nature of digital currencies that use blockchain.
Industry observers say blockchain presents a huge opportunity for banks and financial institutions who embrace blockchain early as the technology could save billions in infrastructure and operational costs.
Likewise those who don’t invest in blockchain may experience a significant loss in revenue and market share from non-traditional players expanding into the financial services market.
Digital Currency Controversy
Although blockchain-based applications are secure thanks to their cryptographic nature, there have been fairly high profile failures on the part of the web sites where the digital currency wallets are stored – usually called “Exchanges”.
This is particularly true of BitCoin, where hackers have managed to steal millions worth of BitCoins due to insecure web sites.
BitCoin has also been used for illegal purposes by many individuals which has led to some jurisdictions, such as California in the US, trying to regulate it, and many groups and agencies calling for it to be outlawed.
Other blockchain-based currencies have not caused as much controversy, but have also not achieved the level of use that BitCoin has.
The Future of Finance
Despite this, it’s clear that even if these early implementations do not make it into the mainstream right away, as the world becomes more digital and the banking industry continues to stagnate, blockchain-based smart contracts and digital currencies look to be good contenders to become the Future of Finance in a world where people want more control, faster service and lesser costs. Incumbents watch out.