Bank of America in January filed 15 patent requests and announced plans to file 20 more for particular uses of blockchain technology such as a “cryptocurrency risk detection system” and “suspicious user alert system.”
BofA’s patent filings, along with similar plans from banks worldwide, that financial institutions are moving rapidly to adopt the blockchain. However, one question that should be considered is simply whether banks are right for the blockchain. Will they encourage or stifle the very nature of the technology?
It’s first important to note that bitcoin began as an alternative to big banks and government control. The goal was to create a decentralized system, free of government control. Thus, a conflict between big banks and bitcoin companies was inevitable.
“Based on the cryptic comments of its founder and early developers, Bitcoin was a reaction to the prosecution and seizure of e-gold and several other popular digital currency systems — [a] symptom of the vice grip that the central banking system holds on the creation and movement of money,” said Ken Griffith, co-founder of the Gold Standard Society.
With banks now recognizing the value of the blockchain, some bitcoin experts are concerned with how the banks might deal with the blockchain.
“I reckon the banking industry will forever be three steps behind where the financial industry needs to be,” said Adam O’Brien, president of Bitcoin Solutions. “The fact that bitcoin has evolved so much in its six years in existence shows how quick the financial industry can move when given the freedom. Banks will always put a block on that freedom.”
Speed is a key issue at hand. Small startups are more likely to innovate and experiment in a much faster manner than huge financial institutions. Also, it can take a long time for banks to actually deploy major changes to their systems.
“Ultimately, it’s very difficult to drive innovation in a bank today, given the oversight and the regulation,” Digital Currency Group CEO Barry Silbert said in an interview with The Economist. “There’s a lot of talk, there’s a lot of interest, but anyone who’s worked on systems at banks will tell you it takes two years to deploy any basic system, so we’re five, 10 years [away from] any of these efforts turning into a product that can be used.”
One reason why banks might not be best for the blockchain is their limited nature. Bitcoin is decentralized and can be utilized by anyone, whereas banks are organizations that are limited by regulations and national borders. “Banks are bound by borders and different legislation, where bitcoin isn’t,” O’Brien said.
A second issue to consider is how banks might apply charges to their new blockchain services. In essence, the blockchain is a ledger that allows users to confirm transactions and prevent double spending, and it is a free technology for bitcoin users, which banks might not respect.
“They are also used to retracting and reversing charges, which bitcoin doesn’t allow for,” O’Brien said. “Further to that, banks are greedy and want to profit on both ends of the coin, they are going to charge for a free technology, something that doesn’t sit well with me, personally.”
However, O’Brien argues that bitcoin companies don’t need to worry about banks taking over the bitcoin market.
“It is great that banks are (finally) seeing the value in the blockchain, but bitcoin companies should still operate as they have been,” O’Brien said. “The banks will never be able to operate as fast as the bitcoin space. They will struggle in the market.”
One final question to consider is whether banks will begin to target bitcoin companies by pushing for regulations or by shutting down their accounts. Virtual Currency Today, a Mobile Payments Today sister publication, has covered stories in the past where banks, which have invested in blockchain research, shut down the accounts of several bitcoin companies.
“Unfortunately, the banks will hold control in that sense. Bitcoin companies (such as ours) will always need a place to store cash. Should the banks disallow that, it would definitely be a struggle to the industry,” O’Brien said. “However, we have been doing it for three years; I don’t imagine it will change for some time.”
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