Christine Lagarde, the head of the International Monetary Fund (IMF) stated that she believes bitcoin and cryptocurrencies with the support of blockchain will eventually replace banks and existing financial systems by eliminating the necessity for intermediaries and third-party service providers.
In a research paper shared by the Foundation For Economic Education (FEE), Lagarde wrote:
“For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators, and some have been hacked. But many of these are technological challenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted and that tablets would only be used as expensive coffee trays. So, I think it may not be wise to dismiss virtual currencies.”
As Lagarde emphasized, the vast majority of cryptocurrencies such as Bitcoin and Ethereum are still struggling to solve their underlying scalability issues. Previously, in an interview with major South Korean financial news publication JoongAng, Ethereum co-founder Vitalik Buterin stated that it could take two to five years for public blockchain networks to scale with two-layer and on-chain scalability solutions.
But, once bitcoin scales to a capacity in which hundreds of transactions can be settled per second, Lagarde explained the decentralized nature of bitcoin could provide general consumers with a more efficient, robust, secure, and cost-efficient financial network as an alternative to the global banking infrastructure.
Furthermore, Lagarde noted that the mainstream adoption of bitcoin and cryptocurrencies would result in the decrease of power of central banks and leading financial institutions. Fiat currencies would no longer be of any value as central banks and local financial authorities would not be able to manipulate the value of assets. She added:
“Today’s central banks typically affect asset prices through primary dealers, or big banks, to which they provide liquidity at fixed prices—so-called open-market operations. But if these banks were to become less relevant in the new financial world, and demand for central bank balances were to diminish, could monetary policy transmission remain as effective?”
Already, through the Bitcoin Core development team’s scaling and transaction malleability solution Segregated Witness (SegWit), bitcoin has been able to scale to a certain extent by decreasing the size of transactions and blocks. Additionally, the demand toward bitcoin and the cryptocurrency market has increased to a point wherein multi-billion-dollar financial institutions such as Goldman Sachs and Fidelity have started to address the rising popularity of cryptocurrencies by launching ventures including cryptocurrency trading operations and mining.
In the upcoming years, through appropriate scaling solutions and the integration of two-layer scaling platforms, bitcoin will be able to position itself at the forefront of financial disruption; challenging banks and financial institutions to evolve into the global financial system.
But the point is can cryptocurrency replace fiat currency? Because cryptocurrencies must replace fiat currencies before we can talk about blockchain replacing banks.
Blockchain technologies are now one of the most discussed topics and come with a wide range of facilities and features. Compared to traditional banks, blockchain has a lot to offer, making it ideal for all types of transactions. The blockchain is a distributed ledger technology, that can be used in many places at once, where smart contracts and transactions can be executed, without involving any type of middleman. This is one concept which may simplify investments, thereby turning all complicated processes into just a few simple clicks. In the future, real estate transactions, as well as mortgages, will be handled on the blockchain.
Blockchain technology has definitely got all of the features that will rule the financial sector, but it’s too early to assume that it will replace banks. Seeing such long drawn benefits of blockchain technology, it is becoming important for banks to adapt. As of now, it’s difficult to know whether the blockchain will remove banks from the process – and as a matter of fact considering the current clampdown on cryptocurrencies by various regulator, cryptocurrencies are far from becoming a replacement to fiat currencies, in that sense, blockchain cannot yet replace banks – but one sure thing is that blockchain will make banks more efficient.
Theoretically, almost every element of the banking transactions can be handled on blockchain technology. Whether you want to buy a piece of real estate, transfer money or are in need of any banking services the blockchain technology will carry out the task in a faster, cheaper and more efficient way. All deals and transactions are recorded on the blockchain registry, soon, it will be adopted by many jurisdictions.
Experts have started promising that this new technology will replace clunky banking services and registry processes, so those days will be in the past, where people had to visit a local bank or find the right clerk to help them with their documents. This new technology will simplify the process and make it easy for everyone to use. It will be a challenge for so many banks and financial institutes to accept this new technology, but they will have no other option in just a few years.
Experts believe that blockchain technology will simplify the process and make it easier for people. Rather than seeking the help of LLCs and dealing with legal, tax and accounting issues, blockchain technology will make the process seamless by bringing in new techniques. What’s more, the blockchain technology, combined with various smart devices, will help investors track the condition of investments and know if things were repaired or replaced on schedule. Individuals will get updates in real time and this will help to eradicate all complexities associated with the present system. Blockchain technology will remove the need for third-party interference; you can blindly trust the system.
So, what should banks do now?
Blockchain technology will take over transaction and recording activities that traditional banks do today. It is time for the bank to focus on adding value to their services. Now it is not only about lending money, the bank needs to play a role in managing the property and helping people do many things. It’s time for financial institutes or banks to reinvent themselves and find new solutions and services.
Banks should start implementing this new technology as soon as possible, they can start experimenting with tracking documentation, creating records and verifying the transaction using this new technology. The financial crisis showed that recordkeeping is not the only aspect for lots of financial institutes or banks. Blockchain technology creates a reliable storage facility which can be accessed based on a public or private chain.
All documentation can be stored safely; processing can be done automatically-going forward. Payments could be made and foreclosure would occur easily – all these things are all possible on the blockchain technology. This is true for auto lending, debt collection, all other types of loans and other related services.
It’s time for banks to act and try to bring in necessary changes in due time, else they might get replaced with something new and advanced – possibly the blockchain.