Tech expert Steven Sidley unpacks whether Bitcoin spells the end for financial institutions
A recent CFO Community Conversation unpacks the blockchain revolution and what it means for banks.
The finance industry has seen a massive revolution driven by Bitcoin and blockchain. During a recent CFO Community Conversation, tech expert and co-author of Beyond Bitcoin, Decentralized Finance and the End of Banks Steven Sidley revealed that financial institutions will have to reinvest themselves in order to stay relevant in a new world of decentralised finance.
“In 1976, the internet changed everything about the way we consume media and upended a whole bunch of industries, especially the music, video and photography industries,” Steven said. “Now, we are seeing a similar shift in the way we transfer monetary value through the creation of Bitcoin and the blockchain, which could lead to the extinction of traditional financial services.”
He added that the reason for this is because blockchain is trustless, permissionless and decentralised.
In the real world, people pay people to get their trust, Steven said. You pay the bank to be your trustee and the custodian of your funds, a lawyer to negotiate a contract, or an insurance company to trust that you will pay out based on your premiums. “The problem with trusting institutions is that sometimes it doesn’t work, no matter what you pay.”
He added that, at the core of the blockchain technology is a set of mathematical algorithms. “There is no space for trust in a mathematical equation.”
In a traditional finance system, everyone has to apply to access services, and in certain circumstances you don’t get permission.
Steven explained that the danger of the permissioned financial system is evidenced in China, where citizens get credits taken off their social score if they don’t follow the country’s rules, and eventually the government cuts them off from their bank accounts. “Once something is permissioned, they can take it away and you can have no recourse.”
Most financial institutions are centralised, meaning there is a governing body at the centre of various services that make the rules. When something is decentralised, however, there is no central body. This means you have copies of that service that exists on thousands of computers around the world, with complete access to all the information.
“In a world of decentralised finance, the asymmetrical power of centralised organisations collapses,” Steven explained, adding that it has introduced a whole new world of loan and borrowing, insurance, exchange and derivative market initiatives that are permissionless and have zero percent interest rates. “Finance institutions can’t compete with this.”