Wall Street is particularly fond of blockchain. Where is the future of the banking industry?

Rage Comment : Although traditional economies have historically suppressed emerging technologies, it is clear that capitalism's most basic problem of trust requires emerging technologies, so financial world leaders such as Wall Street have to start supporting blockchain technology that subverts the traditional financial industry. Just like the development of the US remittance business, people's increasing demand for service quality will inevitably give birth to a new financial system. In any case, blockchain can greatly reduce corporate costs, and the ultimate beneficiaries will be consumers.

Translation: Annie_Xu

Anyone who has ever sent money across borders knows how cumbersome it is. Banks take days, even weeks, to settle money and charge high fees. And when mistakes are made, all the money is lost. “Banking today is like sending a letter, and you can’t tell if it’s reached its destination after you send it,” said Chris Larsen, CEO and founder of San Francisco startup Ripple. His idea is simple: sending money should be like sending a message, so you can know immediately if or when it’s received. It’s certainly a bold, disruptive idea; and one favored by Wall Street bigwigs.

Chris Larsen

Last month, IBM and Crédit Mutuel Arkéa announced the completion of their first blockchain project. A week ago, a group of seven banks, including Santander, UBS and UniCredit, tried to use a blockchain platform developed by Ripple for cross-border remittances. Goldman Sachs and Barclays have both invested in another company that aims to enable real-time transfers. JPMorgan Chase, once skeptical of blockchain, is now working with Citi, Bank of America and Credit Suisse to test blockchain applications in the credit derivatives market. Blockchain, the technology used to store records and the underlying technology of Bitcoin, has now become unstoppable mainstream.

Until recently, Bitcoin was associated with drug dealing, pornography and illegal weapons. Wall Street's interest in blockchain today is like the peer-to-peer file sharing platform Napster in the late 1990s, when Sony Music Entertainment and Warner Music Group were committed to peer-to-peer music sharing. Therefore, some observers are right to equate blockchain with an unregulated open field. Jamie Smith, former spokesman for President Obama, believes that the field of blockchain technology needs more participation from policymakers, and education for regulators is a top priority.

Soon an unlikely alliance was formed. A group of startups that had never been noticed by the public (BitFury, BitGo, Bitnet, Bitstamp, itBit) began to work with the US Department of Justice, the FBI and the Commodity Futures Trading Commission. However, the most enthusiastic supporters of blockchain did not come from Silicon Valley, but from Wall Street. Unlike the big music companies that ignored, shunned and condemned peer-to-peer file sharing, those orthodox bankers suddenly became venture entrepreneurs. So what changed the situation this time?

The question that every modern bank needs to answer is the most basic question raised by capitalism: How do we make strangers trust each other? For example, a mother A in New York wants to wire $1,000 to her son B who is studying in Madrid, Spain. The US bank will immediately transfer the money from A's account to the Federal Reserve account according to the customer's instructions. The Federal Reserve needs to accumulate hundreds of transactions every day before transferring money to the European Central Bank (ECB). The European Central Bank will then distribute these transactions and assign individual transactions to different local banks. Two to four days later, B will find that his account has an extra $900, and the other $100 will go to various intermediaries as management and transaction fees.

This maddening system is not much different from the primitive banking system of a century ago. So what is the advantage of this system? In this complete system, everyone needs to communicate with people they trust, so the US bank only communicates with the Federal Reserve, the Federal Reserve only communicates with the European Central Bank, and so on.

The last time real innovation happened was in 1871, when Western Union introduced a system that allowed real-time money transfers. Using 500,000 locations around the world, A gave money to a bank teller, and a few minutes later, B could get the money at a Western Union counter on the other side of the Atlantic. This system required a lot of scale, so it was expensive, but it worked. Today's PayPal is actually very similar to the online version of this system.

Imagine that the identities of all account owners remain secret, but everyone can see the money in all accounts. In other words, everyone has the same ledger, and it is difficult to modify it unless you control most of the computing power. When A's money decreases and B's money increases, the whole process is transparent, so there is no need for repeated audits by multiple parties. The system is designed to be real-time. This is the basic logic of Bitcoin, and its underlying blockchain technology can effectively reduce dependence on central bank supervision.

In fact, blockchain is a universal banking protocol, much like the Internet protocol in the era of the World Wide Web. It has everything a blockchain needs, from mobile phones to built-in sensors, from simple computing power to machine algorithms. The greatest achievement of Satoshi Nakamoto, the mysterious founder of Bitcoin, is that he invented such an excellent decentralized currency system that many hackers, technical experts, and bankers are committed to various types of experimental projects.

The enthusiasm of the big banks is understandable. They are under pressure from regulators to record securities transactions and money transfers, which has led to huge costs to meet legal requirements. From Basel III to the Dodd-Frank Act, our centralized systems are derived from Soviet-style command and control. By reducing manual processes between customers, trading partners, and stock exchanges, blockchain is expected to reduce costs by $20 billion per year by 2022.

This is also the reason why large banks are beginning to explore new applications, such as immutable identity records, direct operating procedures, and fully automated transactions without human interference. A survey report by market intelligence provider Greenwich Associates shows that the financial and technology markets will invest $1 billion in the blockchain field this year.

But does Wall Street not care about job security? If it affects the bottom line, of course it will not ignore it. When bank deposits are tangible assets, big companies are willing to support any change. American manufacturers have been closing local factories and outsourcing all labor to Asia because labor costs are lower there. SAP or CRM systems require countless redesigns of workflows, but when these systems are adopted, executives show no concern. So the core of blockchain is not a new service or product that overturns the existing business model; it is to help companies reduce costs. Although blockchain is a breakthrough innovation, it can help large companies handle a large number of transactions. And this is what Wall Street knows.

So what will happen when most banks start adopting blockchain? According to standard economic theory, low-cost competitors will only enjoy a cost advantage if high-cost competitors still dominate the market. When everyone uses blockchain, bank savings, which are corporate profits, will no longer circulate. Market competition will force all banks to return consumers' hard-earned money. Bank fees will definitely fall, which should be Satoshi Nakamoto's greatest contribution.