19 April 2016
by John Kehoe

Blockchain to hit bank profits

Blockchain allows customers and suppliers to directly transact over the internet. It reduces the need for intermediaries such as banks.

Revolutionary blockchain technology threatens to slash the profits of banks and wipe out lenders which fail to quickly adopt the online record keeping innovation, a high powered panel of finance and technology experts warned.

Jose Fernandez Da Ponte, global digital business executive at Spanish banking giant, BBVA, said digital disruption to financial institutions by blockchain posed "extremely large" threats and opportunities.

"Those institutions not up to that are likely to cease to exist," he said at a conference in Washington.

At a panel convened by the International Monetary Fund, financiers, technologists and regulators debated the ramifications of the evolving blockchain.

IMF deputy managing director David Lipton said banks and regulators were grappling with fintech advents including virtual currencies, distributed ledgers like Blockchain, smart contracts, crowd source funding and peer-to-peer lending.

​"One significant source of risk may be the erosion of bank revenue in payments services," Mr Lipton said.

This could deliver big savings to consumers, but undermine financial stability, he said.

Blockchain, the online general ledger that publicly records transactions, allows customers and suppliers to directly transact over the internet.

It reduces the need for intermediaries such as banks, by creating a safe and transparent record keeping system.

The shared database technology was originally the platform for the virtual currency Bitcoin, but is now being adopted across the financial services sector.

Charley Cooper, managing director at technology firm R3, said it was too early to know how blockchain would disrupt retail banking and investment banking.

"Any financial services firm right now that is not paying attention to this technology and the potential existential threat is being foolish," Mr Cooper said.

"This could be really as transformative as anything we've seen in our lifetimes."

New York-based R3 is working with a consortium of about 40 banks, including Commonwealth Bank of Australia and Westpac Banking Corp, to grasp how the distributed ledger technology could be applied across the banking industry.

The firm's representatives will be in Australia next month to meet clients and regulators.

"Your regulators and central bank are ahead of the curve on this," Mr Cooper said.

David Yermack, a professor at New York University's Stern School of Business, said blockchain could lead to far fewer banks and perhaps even remove the need for share trading exchanges.

It would render redundant millions of employees who execute and record financial transactions across banking, asset management and insurance, he said.

"Many of the banks are going to lose their base of revenue. They may be defunded and fail."

Blockchain presents potential big savings for financial institutions and their consumers, by lowering transactions costs and speeding up transaction times.

The first commercial deployments could go live in about a year, and the technology will likely take at least three years for widespread commercial adoption.

Bank of Canada senior deputy governor Carolyn Wilkins said distributed ledgers raised financial stability and competition policy issues for regulators. The technologies could become controlled by oligopolies such as Apple, Google or big banks, preventing consumers benefiting from efficiency gains, she said.

Ms Wilkins also said virtual currencies could undermine central banks and monetary policy. "It's interesting to look at the research if a central bank in that kind of world could be lender of last resort," she said.

R3's Mr Cooper said the dire predictions of blockchain wiping out banks and obliterating the need for central banks and clearing systems misunderstood the highly regulated and complex banking system. "This is not an Airbnb and Uber situation where you launch an app, take on a taxicab commissioner in one city, you ask for forgiveness later and pay a small fine."

Laws and regulations were global and multi-layered across jurisdictions, Mr Cooper said.

NYU's Professor Yermack, who has been in discussions with the US Securities and Exchange Commission about blockchain, said the technology was designed to bypass regulation. "The shared ledger is in the cloud so why the SEC would have jurisdiction over this is far from obvious."

Professor Yermack used the hypothetical example of Uber deciding to float shares on the blockchain, rather than a regulated stock market such as the New York Stock Exchange.

Commodity and credit markets faced similar potential shake ups, he said.