Chris Naprawa, President TAAL, a vertically integrated blockchain infrastructure & service provider for enterprise.
Don’t bet against the banks. I believe that the notion that a financial revolution will displace the power and function of large international banks is very unlikely … as long as they continue to adapt and invest.
In 2018, Deloitte conducted a Global Blockchain Survey with 1,000 banks that revealed how curious the industry was about Blockchain technology. More than 95% of respondents affirmed they would make some level of investment in blockchain or distributed ledger technology. Speed ahead two years into a world wrestling with an unprecedented pandemic and rapidly expanding digitization of the economy, and it looks as though the curiosity revealed in the Deloitte study has turned into action.
As the president of a company that offers integrated blockchain infrastructure, I’ve observed that central banks are overhauling their digital infrastructure and adopting blockchain innovations to address complex cost and operational challenges. Some central banks and the governments to which they’re affiliated have accelerated the technology into their day-to-day operations.
The Bank of England, which in 2019 notably undertook a proof-of-concept examination of how blockchain can evolve real-time gross settlement, has actively researched digitizing how it governs the economy, including creating a blockchain-linked version of the British Pound sterling. “Central Bank Digital Currency could present a number of opportunities for the way that the Bank of England achieves its objectives of maintaining monetary and financial stability,” its report says. With digital currencies, central banks can counter the power and influence that monopolies such as Visa/MasterCard, CHAPS and BACS wield on private networks, lowering transaction costs for users and small businesses. In my opinion, a proposed “Britcoin” would no doubt accelerate the adoption of government-sanctioned currencies in Europe and beyond.
The attraction for banks goes far deeper than cost savings or networking efficiency. Blockchains can underpin an evolution in RTGS, increasing the security of digital transactions and removing the potential for errors, confusion, double counting and fraud in bookkeeping. Accounting and audit work, in general, are prime examples of industries that are ripe for disruption from Blockchain.
Blockchain technology also addresses the new realities of the world. While populations, particularly in Asia, were already decreasing their use of physical cash before the Covid-19 pandemic, the health crisis has quickened the volume and value of digital transactions. By the end of 2020, the global digital payments industry grew by 16% year-over-year and reached $5.4 trillion in value. The regions seeing the fastest growth in digital payments are Europe and the U.S., catching up to China, where digital payments in 2020 are valued at nearly $3 trillion.
As China aggressively trials the “digital yuan,” it has gifted millions of dollars worth of its currency to its citizens to evaluate the feasibility of a cashless society. Though not a pure Blockchain innovation because the digital yuan would still be controlled by China’s central bank rather than existing as a decentralized currency, the experiment punctuates the increasing use of digital infrastructure among banks worldwide — even in a market philosophically opposed to de-centralization.
What China is doing — aiming to control the Blockchain-driven digital world of commerce — works for its political makeup. Still, democracies want transparency, and more and more of them are demanding low-cost transactions. To get those attributes, I believe they need an open blockchain as the foundation of their network. The notable traits of open, or permission-less, blockchain include:
• The ability to provide finality and immutability of transactions.
• Native tokens that maximize on-chain liquidity.
• And the transparency only a distributed and decentralized chain can offer.
These features can make for a smarter, more compelling solution for big banks in democratic nations. As Blockchains evolve and more businesses utilize them, it has become clear that not all of them are the same, but the successful ones will meet the demands for high-volume data throughput. The original framework of Bitcoin focused on reducing cost and increasing trust while bypassing third parties that add cost but create time friction and cost. The winning Blockchain protocol must be stable, scalable and very low cost.
The Italian Banking Association, for example, introduced the Spunta nodes network in October 2020, which has integrated most of the nation’s banks and processed transactions quickly. The cooperation between banks has also led to a more transparent landscape and standardization of activities within the Italian banking sector.
Looking at the Blockchain now is like looking at the internet in the mid-90s. I believe organizations and institutions that fail to understand the opportunities and threats will be left behind, just like how many industries changed in the 90s. After all, financial transactions and banking are only one part of the economy, so the solutions that banks choose must also work with the hundreds of non-financial blockchain applications that are right around the corner.