Blockchain Banking or Crypto Banking has been one of the applications of the Blockchain technology which is being discussed in some security circles. It is being hailed as “Secure”, “Transparent”,” resistant to fraud” and eliminates the need for third party intermediary and therefore is faster than conventional Banking, reduces transaction costs and increases financial inclusion.
This thought process needs to be moderated with the possibility of destruction of the conventional financial system which would be detrimental to the society.
When Banking system adopted technology, there was a claim that the costs would reduce since back end processing was automated and became more efficient and error free. However this promise did not materialize. Banking became costlier for the customer and more frauds surfaced.
Similarly, the Crypto Banking having all the virtues is also a myth that would destroy the current system and introduce a more risky system in the coming days.
Essence of Block chain technology is that a transaction record is kept in a public ledger and all the “Node Owners” will have copies of all the transaction blocks. The transactions would however be encrypted. Hence the system would multiply the data storage several folds. Since the transactions are encrypted, the node owner may only view a transaction as from X to Y of a certain value and type and not knowing who is X or Y. Hence the claim of “Transparency” is not correct. In fact If X or Y is a fraudster and imposter, the person authorizing the transaction wo views only a hash value representation has no idea of the fraud.
Secondly, if the node owners are members of public there would be no liability attached to their authorization and hence fraud victims cannot hold them responsible. In a Banking environment or a private block chain where the block chain is owned by the Bank itself with its own officers being the nodal controllers, the responsibility can be fixed on the Bank. But this would not eliminate the need for the intermediary. What would change is that the transactions would be stored in terms of encrypted blocks instead of the central server (which also can be encrypted).
If the Banking ledger is kept as a “Public Block Chain” then we will be converting the money of the customers into a virtual data chain which if unauthorizedly modified, is no body’s responsibility.
In the legacy Banking system, the depositor lends his money to the Bank with a contractual guarantee of the same being returned with interest. The Bank is expected to invest the money received in loans and earn an income besides contributing to the development of the business and creation of further assets through a multiplier system.
The block chain banking would block the multiplier system that works in the legacy banking system creating money for development. It would be like every depositor keeping his money in his house and is unproductive.
All other arguments that block chain banking system will reduce inflation etc are also unlikely to materialize. If money supply is withdrawn from the system, then to some extent money available for purchase of goods and services would reduce and this leads to deflation and reversing the progress of the economy. In the long run all persons who have held their Bank deposits in the form of Block-Chain-Bank accounts managed by private Block-chain-syndicates would be at the mercy of a coterie that would take over the majority of nodes and play with the money of the public. These owners would convert the Block chain holdings into real cash through fraudulent transactions and enjoy their dollar wealth where as genuine depositors would live in a false sense that they have a “Crypto Wealth”.
I therefore consider that this would be highly harmful and create a large scale bankruptcy.
Invite counter views.