Blockchain and Banking: The Irony

Blockchain Technology and Banking

I noticed a circular trend while conducting research on blockchain’s relationship with banks. While banks and financial services have been affected the most by blockchain technology, they also are the first entities to develop R&D for this technology to evolve in the financial realm.

In regards to blockchain and banking, we can view it as a tiger and deer taking a stroll together. It might either be a clever strategy to outwit the disruption caused by technology or just a means to scale up alongside advancements.

We don’t have a concrete reading on the situation above but let’s see how banks have clawed their way into the fire that could possibly burn them out.

Banks entering into the Crypto Domain

HSBC’S claim to its trysts with blockchain blows whistles of triumph, by using a blockchain based platform, Corda, developed by a startup called R3. Through this initiative, HSBC successfully issued a Line of Credit (LOC) to ING, a Dutch lender, to ship soybeans from Argentina to Malaysia. This cross-border transaction, that usually takes five to ten days, closed the deal in 24 hours.

Twelve major Chinese banks issued invoices and cross-border loans where they implemented an ID authentication process via blockchain that removes multiple KYCs done for one customer. However, it has offered unsecured loans for agricultural e-commerce through an automatic loan issuance process, according to merchants.

More interestingly, UBS, a Swiss bank, entered into two transactions that automatically formed agreements through smart contracts, whereby the payment transactions got recorded on the blockchain. The inter-country trades included shipment of cars and textile raw materials. Even the capital market is not alien to blockchain anymore. Credit Suisse and ING have exchanged securities worth 25 million euros using a Corda based app.

Banco Santander, a UK based bank, has developed an international payment service called One Pay FX. It also piloted a shareholder voting with three other institutions. Citibank expressed an interest in investing in state-backed cryptocurrencies pointing out the advent of fiat currencies issued on the blockchain or cryptocurrencies. However, they have put their emphasis on cryptocurrencies to best suit this initiative.

The process that Citibank is following is quite interesting to look at, where a custodian will be able to hold the cryptocurrency with the so-called DAR (Digital Asset Receipts) issued by Citigroup. The bank will then alert the Depository Trust & Clearing Corp (DTCC)- a Wall Street middleman that provides clearance and settlement services- that it has issued a receipt. This certainly lends an important layer of legitimacy and gives investors a way to track the investment within a system that they are already familiar with.

Fiat vs Crypto

The dexterity that blockchain provides is very alluring but we cannot ignore the circle we are being put into. As an investor or customer, we intend to have clarity on this particular matter of choosing between fiat and crypto. However, the question that now remains- what is blockchain’s stand on this?

Blockchain was supposed to replace DTCC and remove intermediaries. However, it makes sense to monitor crypto through regulations. Many Central Banks are working towards their currencies on the blockchain. However, I am not sure if you want to call it quasi-fiat because it is a full-fledged currency on the chain. DTCC was supposed to be a prime target for disruption.

In the case of Citibank, I feel like the forest will lose its trees by going back to DTCC controlled assets for Crypto.

Citibank doesn’t necessarily think of controlling crypto, but it is trying to ensure it doesn’t become irrelevant in the crypto world by taking advantage of the perceived or actual risks currently associated with cryptocurrencies.

Final Thoughts

If we go by human evolution; though individuals crave total freedom, we still want order and governance to function as a society. Similarly, we want total non-interference by governments or central agencies with cryptocurrencies. However, humans by nature have the tendency or need to hold somebody accountable.

I am starting to realize that, in order to scale, cryptocurrencies will have to become quasi-fiat currencies. Reaping its design benefits will reduce some frictions in payment processes and management by a government body/central agency, to give it legitimacy.

Therefore, for our disruptive times today, we need to be alert in regards to the direction that the technology is taking, and that our faith remains in the right direction. Banks and centralized systems may not be in a null void yet. The question is- can we, as customers of efficiency, starve ourselves in the long run?

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