BBVA: Blockchain Tech Could Replace Centralised Finance System

Blockchain technology could be used to bypass today's centralised financial infrastructure entirely, according to a report by BBVA Research US.

The report, titled Blockchain Technology: The Ultimate Disruption in the Financial System notes that the application of blockchain technology would first be useful in the payments space, where it would eradicate the need for any intermediaries and significantly reduce costs for banks.

However, decentralised public ledgers could disrupt the financial system as a whole, adds the report. "Given that the majority of financial assets such as bonds, equities, derivatives and loans are already electronic it may be possible that someday the entire system is replaced by a decentralised structure."

Touching upon smart contracts, the report also noted how being able to register and trade assets on a decentralised register increases efficiency.

It adds:

"In this environment, the current system where financial institutions record individual's accounts in a centralised fashion and the bank's reserves are stored by the central bank would be replaced by the 'Internet of money' or the 'Internet of finance' – a fully decentralised financial system."

Challenges and risks

The possibility of a decentralised public ledger replacing the current centralised system, the report says, also comes with various risks and challenges.

Firstly, a decentralised system would have to offer the same or a higher level of trust and protection than the current centralised financial structure.

For this to happen, the report explains the decentralised system would have to concentrate a "massive amount" of computer power and in turn be able to cope with the huge energy consumption required to support it.

Furthermore, the decentralised system would also have to deal with legal and regulatory concerns, as well as with matters of national security, such as money laundering, fraud, tax evasion or terrorism.

The report notes that digital currencies could also suffer price volatility, which could have sizeable negative effects. "These shocks could generate systemic risk and severe economic downturns ... in this scenario, monetary policy would not be able to respond effectively if it fails to boost demand among a large share of economic agents that use digital currencies."

The risks aside, BBVA Compass believes blockchain technology has a bright future ahead. Its report concludes:

"Therefore, the key question is not how, but when the disruption will become far-reaching. As other industries that have been transformed by new technologies and digitisation, blockchain technology could reshape the financial industry well beyond the payments system."

BBVA and crypto

BBVA Research is the economic research department of BBVA Group, but this is not the first time the global Spanish banking group has entered the crypto arena.

BBVA Ventures, the private equity branch of BBVA, participated in Coinbase's $75m Series C funding round – the biggest investment in a bitcoin company at the time.

Just recently, BBVA's Open Talent competition – a global fintech startup competition – included nine crypto startups in its three regional finals.

BBVA Innovation Center also posted an online tutorial to inform consumers on the uses of digital currencies and give them a better idea of where these could be purchased.

BBVA mage via Hadrian / Shutterstock.com