It's Finally Dawned on the Banking World - Blockchain or Bust for Bankers

A relatively sedate market overnight, still continuing the downward trend albeit at a reduced rate. The global cryptocurrency market cap is now $306 billion, down $6 billion on yesterday, Bitcoin currently at $7118, down $110 and Ethereum also dipped by $15 over the same time to $520.

The Bank of England has released a staff working paper that could well mark a pivotal point in banking history. The paper itself looks at Central Bank Digital Currencies (CBDCs) and the potential effects on the traditional banking sector, only to reach the conclusion that CBDCs could be a potential competitive threat to the profitability of the current banking system. Worth bearing in mind at this point that BoE governor Mark Carney is said to be “open-minded” to the concept of CBDCs according to Bloomberg a few days ago.

That view could well change in the coming days if the BoE working paper is anything to go by. Amidst the overwhelming amount of financial jargon used in the paper, it essentially boils down to a few things.

Currently the good old retail banking practice of taking retail deposits (cash etc) and storing them is very profitable, and further compounded by lending said deposits to borrowers. The introduction of “non-bank” service providers that could potentially provide the exact same services without being an actual bank will put significant competitive pressure on traditional banks to maintain profit margins, customer acquisition rate and client retention – all of which are at the core of banking revenue streams. It is of course perfectly feasible for new “non-bank” entities to be considerably more competitively priced given their substantially lower overheads alone.

Another issue highlighted in the paper is that of the possibility that the “non-banks” could seriously encroach into traditional banking operations and more highly profitable areas – a footnote from the BoE paper states: “With respect to the availability of overdraft facilities, it wouldn’t be unimaginable that the private operators could also provide lines of credit bundled with payment functionalities.” Whilst this would be unlikely given the existing lending regulatory requirements, it is nonetheless a valid point.

Fears of “retail deposit outflow” are also covered in the paper – and rightly so – in short, if a digital banking system running alongside the traditional banks is able to perform all the transaction requirements for a fraction of the cost and at a faster rate – the general public will move over to a digital structure on cost factors alone.

Whilst the BoE paper has a caveat stating it is research piece and not the views of any of the regulatory or official bodies (these things are not written for fun – they are produced to further discussion over regulatory matters) papers such as these have a tendency to shape the future. If you’re familiar with UK banking you’ll probably remember the days of the “Building Society” – similar to a bank but with regulatory requirement to hold sufficient funds to cover the book (i.e. physical inventory). During the course of the Reagan and Thatcher administrations, regulation changed significantly, dissolving the need for building societies to hold inventory and by default converting them to banks, which the banks at the time bought up and floated (because the cash books behind them were vast) – only to later pillage the cash book with mortgage lending at excessive loan to value rates which led to the mortgage crisis of 2008, and coincidentally enough, just 9 days into 2009 – Bitcoin was born…

Suffice to say – it appears to have dawned on the banking world that change is happening, competition is coming and it’s not going to go away no matter how much they try to talk it down. The time to object or change the existing system has long passed by - "adopt, adapt or die trying" is the likely motto for the bankers wishing to continue their careers.

New ICO Ratings on ICOfromula:

IcebreakerAR (IBAR)
Check Car (CCR)
Liqnet (LEN)
Xenchain (XEN)

 

Created: Tuesday, May 29, 2018

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