Blockchain and Banking: A Future Match?

Blockchain and Banking: A Future Match?

In early 2018, several cryptocurrencies reached eye-popping valuations and then severely contracted in just a matter of weeks. The price of Bitcoin highlights this journey from peak to trough, beginning 2017 with a market cap of USD 17 billion to a staggering USD 589 billion by January of 2018, only to recede to USD 394 billion by February. Still, this event reflects the fact that many people have taken an interest in investing in cryptocurrency. Banks and financial institutions have a similar interest: while a great number have shied away from purchasing cryptocurrencies due to their extremely volatile nature, many have considered implementing cryptocurrencies’ underlying technology into their operations. That technology is blockchain. 

What is blockchain technology, and how does it work? Invented in the early 1990s as a tool to prevent fraud and keep secure, complete, and efficient records, the blockchain is simply a recording system. Many describe a blockchain as a ledger that transfers information between two parties and uses an algorithm to confirm these transfers. The true identities of the parties involved for each transaction are encrypted, and once the transaction occurs, it is given a coded label, or in blockchain speak a hash. Then, network computers determine the algorithm, or mathematical formula that calculated the hash, confirm the hash, as well as the change of information exchanged between parties. The computer adds the resulting amount of information each user has, as well as the hash, to the network, or blockchain. Thus, the blockchain accomplishes two things: it acts as an intermediary between a two-party for transactions, and it keeps a record of how much information each party possesses in real-time. Ultimately, this information can be anything: number of Bitcoins, medical records, or contractual obligations.

Some banks now realize the potential that blockchain technology poses and have begun trials. JP Morgan Chase began testing its blockchain technology in February of 2019. JPM coin, which functions on the JP Morgan Chase blockchain, would dramatically speed up international transactions between JP Morgan Chase bank users, settling payments in minutes. Usually, it takes several days for payments to finalize. JPM Coin is a stable coin, pegged to the US dollar, meaning that JPM coin is equivalent to USD 1. JP Morgan Chase is not the only bank to consider blockchain; several banks worldwide have adopted some form of blockchain technology. Like JP Morgan Chase, other banks use blockchain to accelerate cross border transactions or implement smart contracts.

While many banks have created proprietary blockchains, will they accept digital currencies like Bitcoin and Ethereum for securities purchases or mortgage payments? Major companies, including Microsoft and AT&T, allow their customers to pay for merchandise and services using Bitcoin. For these companies, accepting Bitcoin means saving on transactional costs which accrue when customers use traditional payment methods. Many big banks, however, are leery of accepting Bitcoin or other cryptocurrencies and then holding it due to the extreme volatility. 

Whether all banks eventually accept cryptocurrencies as a payment remains an open question, and until the price of Bitcoin and other cryptocurrencies becomes less volatile, most will probably remain hesitant to accept it. However, most banks see major value in the efficient nature of blockchain technology, and thus they will continue using this in various ways, especially for cross-border transactions.

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