Could Smart Contracts Sideline Banks?

November 19, 2018

Could Smart Contracts Sideline Banks?Photo credit: Elsa Ruiz

By Penny Crosman, American Banker

Imagine a world without banks or other financial middlemen.

That's the vision of Andrew Keys, the founder of ConsensSys Capital, a venture capital firm that fosters the development of decentrailized blockchain services and applications, who says smart contracts running on Ethereum could essentially take the place of banks.

He argues the role banks play in providing identity and reputation verification and acting as a trusted third party for entities that don’t trust each other can be handled by software.

“The concept of being a trusted middleman to process payments at, I’d argue, an egregious rate, or to audit transactions — all of that will become automated and commoditized,” Keys said last week at an event called Democratizing Finance held at the Museum of American Finance. “People will still need financial services and people will still need expertise, but the added value will be higher in the stack,” for instance, in providing financial advice or liquidity.

But not everyone is sold on this concept yet.

“For better or for worse, people outside the blockchain bubble have no trust for distributed ledger technology, particularly as it gets confused with cryptocurrency,” said Alex Jimenez, vice president and senior strategist at Zions Bancorp.

Though he agreed with Keys’ overall thesis, he pointed out that blockchain technology has issues around scalability and overcoming inertia that have yet to be addressed.

Firoze Lafeer, chief technology officer at the fintech small-business lender Breakout Capital Finance and former head of Capital One Labs, had a similar assessment.

“While many financial transactions may soon be done with blockchains and smart contracts, intermediaries are here to stay,” Lafeer said. “The move to blockchains and smart contracts does not eliminate all risks in financial activity. There is a role for banks and other companies who understand how to quantify and monetize risk in this commerce. In fact, I would argue that we will discover new and stronger opportunities for intermediaries in this industry.”

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