Cryptocurrency and blockchain technology have been in the headlines for quite some time. Many believe that these will have a significant impact on the way banks do business in the future. Blockchain and cryptocurrency are still in the nascent stage. Nevertheless, they have been deemed disruptive and could potentially shake up the banking landscape in the coming years.
What does disruption mean?
Professor Clayton Christensen first introduced the idea of “disruption” in 1997. According to him, disruption refers to any innovation that transforms an expensive, complicated product into one that is more affordable, easy to use, and readily available. The process can be a long one, sometimes taking years. It could take several years or decades before the results of disruption start presenting themselves in the market.
What makes crypto disruptive for banks?
Crypto is a digital asset that is designed to work as a medium of exchange, but it does not exist in the physical form, like paper money. Bitcoin was the first and perhaps the most popular cryptocurrency in the world today.
Cryptocurrencies are based on blockchain technology. Three aspects of blockchain technology make it the most disruptive for banks.
Blockchain works on a decentralized network. The operations are similar to that of a bank, but there is no central authority to monitor the data. There are no middlemen involved, and the power totally rests on the owner of the assets.
Blockchain can also be viewed as a distributed ledger, allowing ledger activity sharing between multiple parties. The most important aspect of blockchain is its ability to automate transparency, and thereby trust, in all involved parties.
Blockchain technology has been designed in a way that it is practically impossible to modify data. Blockchain networks adhere to strict protocols for validation and changes cannot be made once the system has been set.
Crypto and blockchain are likely to have a significant impact on the entire financial system. However, they are expected to be the most disruptive in the following use cases:
- Cross-border payments
- Clearing and settlement
- Share trading
- Syndicated lending
- Trade finance
- Digital identity verification
- Accounting data reconciliation
- Smart contracts
How will crypto impact the future banking ecosystem?
Thanks to crypto, the future banking ecosystem will be a lot different than what it is today. The disruptive nature of crypto will pave the way for innovation, collaboration, and bank-fintech partnerships. The need for middlemen will be greatly reduced, but the need for collaboration between banks and other parties will significantly increase. There will also be increased competition, especially from newcomers.
The future success of banks will largely depend on their willingness to cooperate with other banks and various other third parties, like payment processors and app developers. Blockchain may allow banks to create financial products that are safe and secure and bring innovation in the financial sector.
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