Blockchain is a disruptive technology that will fundamentally change banking as well as many other industries. Bitcoin is an electronic currency that uses blockchain to transfer funds from one party to another. Let’s examine what is blockchain, why it will increase in popularity, what it means for the banking industry and explain bitcoin.
What is blockchain?
Blockchain is a technology that uses distributed databases, math and cryptography to record transactions. Think of it as a system composed of many giant accounting ledger databases all synced with identical transaction information. Each new financial transaction gets copied or stacked in sequence like Lego blocks. This means that it is virtually impossible to hack since it would be necessary to hack millions of databases. A good analogy to blockchain is Napster, the peer-to-peer music sharing company in the 1990s. Music fans could download song files to their computers from the network but would also be sharing their downloaded song files with other fans. Still confused about blockchain? Try watching this short “What is the Blockchain” video or this longer Blockchain TED Talk with Don Tapscott.
Why will blockchain become popular?
Currently, the global financial system is enormous, but it is very cumbersome to transfer money. While you can send an email around the world in a second, transferring money can take days or even weeks to arrive at its destination. Financial intermediaries are required to transfer any sum of money, each of which takes a service charge. These financial middlemen are more often the victims of fraud than the rest of the economy, which results in greater regulation and higher costs for all parties involved. Blockchain will reduce the number of middlemen while increasing security, both of which will reduce costs. Blockchain will increase the velocity of money, which will increase cash flow and capital investments.
What does blockchain mean for banks?
Blockchain presents a double-edge sword for banks. On the one hand, it could potentially save banks billions in cash by dramatically reducing processing costs. Banks are salivating at the opportunity to reduce transaction costs and the amount of paper that they process. Implementing blockchain would make banks increasingly profitable and valuable. Santander, a bank based in Spain, put the potential savings of blockchain at $20 billion a year. Alternatively, the opportunity to start a bank with lower costs has attracted many new fintech startups to the market. Banks are also hedging their bets by directly investing in fintech startups. According to KPMG, in 2016, venture capital funding to global fintech companies reached a record $13.6 billion while overall investment in fintech companies totaled $24.7 billion.
What is Bitcoin?
Bitcoin is an electronic cryptocurrency that uses blockchain technology to transfer money. Right now, one bitcoin is worth about $1,000. It was founded in 2008 by an unidentified programmer, or group of programmers, under the name of Satoshi Nakamoto, which is probably an alias. Bitcoin transactions are verified by network nodes and recorded in a public distributed ledger called the blockchain. It has no central depository, which makes it decentralized virtual currency. The amount of bitcoins will become fixed in 2020 at 21 million bitcoins.
What will be the result of blockchain? I predict that blockchain will dramatically reduce inefficiencies in the financial marketplace. Banks and financial institutions will take advantage of blockchain benefits and incorporate many of the advances being implemented by fintech startups. Some of these new startups will grow to become major financial players just as PayPal has grown into a major player with over $10 billion in revenue and $30 billion in assets. Banking costs for consumers will decrease and there will be reduction in fraud.
If you want to learn more about the blockchain or bitcoin, I suggest you follow key fintech influencers like Jim Marous, Chris Gledhill and Spiros Margaris. They are very active influencers who share many interesting articles about the blockchain and bitcoin as well as related articles about fintech and artificial intelligence.