The established financial system has a nuanced relationship with blockchain and cryptos. A recent note from JP Morgan asserted that blockchain technology was a few years away from widespread adoption in finance, which may be yet another conservative assessment of how fast blockchain is penetrating major markets.
JP Morgan was far less kind to cryptocurrencies, which they see as a non-starter when it comes to a means of savings and payment. According to the bank, cryptos aren’t likely to do well, ever, even if there is a major financial crisis. From JP Morgan, “Even in extreme scenarios such as a recession or financial crises, there are more liquid and less-complicated instruments for transacting, investing and hedging.”
Despite what appears to be a somewhat lopsided view of cryptos, there are no shortages of blockchain projects that are entering pilot testing at the moment. To JP Morgan’s credit, they did concede that blockchain was likely to catch on in trade finance, which is more or less stating the obvious.
JP Morgan May See Blockchain and Cryptos as a Threat
What is JP Morgan, really?
As one of the largest banks in the world (top 10), as well as a merchant bank that has access to almost every financial market on earth, they stand to lose a tremendous amount of money if blockchain-based systems cut into their business.
The reason why blockchain could do this is simple; big banks are basically just hustling numbers. Mega-banks don’t actually produce anything (besides gambling advice for the wealthy), instead, they act as glorified (and highly paid) clearinghouses for information.
Blockchain Could Replace The Existing Financial System
A recent piece from Venture Beat dives into how blockchain’s real capacity to undermine existing systems may be underestimated.
An interesting line of thought argues that within the Internet technology stack, protocols created value, but applications were able to monetize those protocols. HTML was a massive leap forward in communication, but companies like Facebook and Google were really the ones to make all the money on the new technology.
The idea is called the ‘fat protocols thesis’, and it argues that the way that blockchain protocols operate capture most of the value, thus they are ‘fat’.
From the original 2016 fat protocols thesis, “the market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer.”
Adopt or Perish
The risk that blockchain poses to established financial structures is easy to understand when we look at a business model like JP Morgan’s. The internet allowed companies like JP Morgan to blast their efficiency higher by replacing archaic systems like physical mail and faxes with fully electronic communication, but the net benefit to their consumers was minimal.
People have to deal with money center banks and use fiat currency, so they are still stuck using a system that isn’t open to real competition. Blockchain has the potential to change all that.
With blockchain, people are able to forgo using a bank at all. This doesn’t necessarily rely on proof-of-work system either. Peer-to-peer exchanges can facilitate trade in blockchain-based tokens at much lower costs than the established banking system, though this may not be 100% satisfactory hardcore crypto libertarians.
The Killer Catch-22
The real problem for the banks is that ultimately, they are publicly traded companies. Any company has the responsibility to maximize returns for their shareholders, which means using the most efficient technology available in order to cut costs.
So far, that has been demonstrated in pilot blockchain programs like the one that Standard Chartered just used to settle a transaction of garbanzo beans between an Indian buyer and Australian seller. However, with every successful use case for blockchain, the reasons to adopt it on a greater scale will become stronger.
Eventually, fiat currencies will be seen for what they are: a monopoly that is impeding social efficiency. When that happens, global banks like JP Morgan will have to adapt to a world where shuffling data is no longer a multi-billion dollar business.