How can Bitcoin technology disrupt traditional banking?
In a Digital Economy where innovations and disruptions are the order of the day, the mighty banking sector is gradually feeling the heat, with lots of changes taking place behind the hood of traditional banking.
One of these changes is “peer-to-peer” banking that obsoletes the traditional role of the bank to act as a mediator between lenders and borrowers.
Crowd funding for example is becoming more and more popular. Another overwhelming example is the IPO of Lending Club, the world’s biggest peer-to-peer lending company. If it were not for the Alibaba IPO in September, Lending Club would be the break out tech IPO of 2014.
So what does Bitcoin technology have to do with all of this?
Virtual money is not very new. David Chaum introduced digital cash in 1983, in a setting with a central server. What is new however is the ability to manage virtual money in a distributed manner with no need for a centralized enterprise to manage the same. The Bitcoin protocol solved the problem of preventing “double spending” in a distributed system. In other words, Bitcoin protocol opens the door for managing one “ledger” at multiple nodes of the network.
This problem was solved in January of 2009 by Satoshi Nakamoto who released the first widely used implementation of peer to-peer electronic cash.
I will not try to get into depth of the mathematical algorithm, nor the monetary “value” of the Bitcoin and its fluctuations.
However, imagine the implications, the possibilities, and the risks this has opened:
Regulation – if there is no “central ledger” and no “central enterprise” at the heart of the system, who is the relevant regulator and who will be regulated? Traditional financial institutions hold a key role in any money laundering or any other nefarious activity. They hold responsibility of “know your client” (KYC) and investigate the source of the money they process. In a “peer-to-peer” world, who will enact this important role?
Transparency – The Bitcoin reputation is that of a dark anonymous system. Bitcoin earned this reputation as there is a lack of regulation and supervision, coupled with certain technologies that have made it an arena for illegal money transfer activities. The reality however is the opposite. The foundation of the protocol is that the ledger is open to all the nodes in the network. No single entity can change any record “in the dark”. Imagine how this technology can be used to develop systems that are fair and open to all. A Taboo system is a great use case for such technology
Cutting the middle man – a traditional money transfer for example changes multiple hands (and in some cases multiple currencies) during the process. The acquiring bank, mediator banks and the issuing bank just to name a few. In the new Bitcoin world, everyone shares one open ledger. So no mediators are needed to complete a transaction.
Looking at Bitcoin as a protocol rather than a currency is fascinating in my eyes. It has the potential to change the foundation of the digital economy. For good or for bad.
