accounting academy weekly ledger accounting academy weekly ledger

Executive's Inference: Bitcoin and Banks

Ralph Perdomo

It all makes sense now! This whole Bitcoin/blockchain thing—it finally clicked. And it all happened after watching this TED talk video.

In a word, it's all about trust in a relationship.

Let me start with some backstory—it'll help you get to your own epiphany.

bitcoin meteor flying toward bank
Illustrated by Ryan Mason

Bitcoin, a cryptocurrency, stepped onto the scene back around 2010 or so. And when it did, it was everywhere. You couldn't watch the news or read an article without a mention to buying Bitcoin.

Everyone wanted in on the action, too. Even the Winklevoss twins, of Facebook notoriety, claimed a piece of the virtual currency pie (it's rumored that they held about 1% of all the Bitcoin currency in the year 2013).

The market responded to this excitement with a proliferation of alternative Bitcoins, or alt-currencies. From dogecoin (pronounced "doggie coin")—a coin featuring a Corgi as its logo—to coinye—an alt-currency named after Kanye West—Bitcoin was everywhere.

This is also when the confusion started. Suddenly you didn't know which Bitcoin was the Bitcoin that would stick around. Like Betamax vs. VHS, or Blu-ray vs. HD-DVD, it was a format war of cryptocurrencies.

This didn't bode well for the future of Bitcoin. Imagine your disappointment when a private merchant accepts dogecoin instead of the coinye in your virtual wallet.

However, once the excitement waned on Bitcoin, a new thing came to light: the blockchain.

Blockchain is the technology that powers Bitcoin and other virtual currencies. It's also a type of distributed ledger. So think of Bitcoin as a branded version of blockchain. That's it. That's all Bitcoin is.

Let's expand on the blockchain part—I'll also touch upon the distributed ledger part.

The blockchain, much like the name implies, is a chain of blocks. In Bitcoin's case, individual blocks are comprised of all the transactions that occurred in (roughly) a 10-minute window. Each block is then verified before it's attached to the chain. This verification results in the formation of a hash—an equation representing all the digital currency transactions in the block.

But the hash also relies on the previous block's hash. Part of the hash equation can only be solved with the value of the last hash. So if any block before any other block is ever changed, the hash values wouldn't match, and that block or segment of chain would be invalid.

Next, synchronize this digital process in real-time across a network of many computers running the same instance of this blockchain. That's the distributed ledger part of blockchain.

This is how trust is built in; through a means of self-monitoring for management and distribution that's based on the integrity of its past.

And it's this inherent high level of trust that's made banks take notice.

Putting it together

Forward thinking banks already understand the power of the distributed ledger. It was, after all, those same banks that were approached by R3 in creating the next-gen banking infrastructure that will take the industry into the blockchain era.

Their platform takes the good from the distributed ledger and sprinkles in the privacy that banks require. Instead of unfettered access to all transactions in the distributed ledger, R3 only makes that information available to the parties that need to know it—the relationship between the bank and the consumer.

But that's just one example.

What it boils down to is the ability to have a customer's balance, account, assets, investment portfolio—you name it—available to any entity that interfaces with the banking industry. Issues of trust are no longer a hindrance or an obstacle; trust is implicitly granted in every relationship.

Make no mistake, though. This isn't some sort of utopian future of banking. Rather, it's a future that promises to remove friction—friction from an archaic infrastructure that's a patchwork of cobbled-together solutions.

And if the tech industry has taught us anything, it's that consumers part with their money faster in a frictionless economy.

Banking as a service

This is where banking is headed. And it will be heralded by the adoption of a distributed ledger.

Because every financial entity has unfettered access to the same ledger, banks can create different services for their many different consumers. What's more, banks and other financial institutions can form alliances and offer even more products through packages. Think of it like building a Lego model, only you're no longer limited to the Legos in your toy box.

And since the infrastructure is all on one tightly connected network, delays will be a thing of the past. This will be instant banking.

Which brings us to the Spiderman paradigm: With great power comes great responsibility. Banks will have the power to create radically different products and services, and they will have a responsibility to deliver these to consumers—or risk them moving to a competitor.

It'll no longer be a hassle for clients to move to another bank.

They'll no longer have to update multiple profiles with new debit or checking account numbers. When the entire banking infrastructure is distributed to all the players, account numbers act as proxy. Changing banks may simply be a matter of logging onto another bank and clicking the import button.

The more things change in the banking-as-a-service future, customer service will be the most critical product a bank has. Even in the forefront of a distributed ledger future, banking will still—and always—be about relationships.

 

vcc-case-study