How blockchain technology could halve banking revenue

And other potential disruptions.

JOHANNESBURG – Blockchain technology could swallow as much as 40% of global banking revenue by overtaking the verification of payment transactions, according to Farzam Ehsani, leader of Rand Merchant Bank’s (RMB) blockchain initiative, who believes that in the future, we may bank directly with the Reserve Bank.

Speaking at the Gordon Institute of Business Science (GIBS) this week, Ehsani said that blockchain technology has the ability to disrupt payments (the transfer of value) and deposits (the storage of value).

According to McKinsey, global payments revenue rose 9% in 2014 to reach $1.7 trillion, increasing its share of total banking revenue to 40%.

Blockchain technology disrupts payments because it enables individuals and entities to transact and trade assets, such as cash, shares and property, directly with each other without the need for a trusted intermediary to verify the transaction.

These assets are instead transferred via a “consensus mechanism”, explained Tanya Knowles, head of innovation and projects at Strate.

A network of computers – which keeps a distributed ledger of these assets, similar to the way banks keep records of your bank accounts – effectively hosts the consensus mechanism.

Transactions done via a blockchain are forever stored in the blockchain – which then becomes a store of value, similar to a bank account – verifying the true owner of the assets and ensuring they cannot be copied or sent to multiple people.

Crypto-currency, bitcoin is one of the better-known assets currently transferred via a blockchain.

But an increasing number of industries are developing blockchains for various different purposes.

For instance, Everledger is a digital ledger for diamond certification and related transaction history, which can be accessed by jewellers and insurance companies.

“A blockchain could serve as the official registry for government-licensed assets or intellectual property owned by citizens and businesses, such as houses, vehicles and patents,” according to Deloitte.

“BitHealth, a US start-up, is investigating use of the Bitcoin blockchain to store and transmit healthcare records securely to make it easier for patients to receive treatment wherever they are in the world,” Deloitte notes in a paper entitled Blockchain applications in the public sector.

Banking with the central bank

“Until 2009, no one had transferred value digitally to another person without a trusted intermediary,” RMB’s Ehsani said.

The reason for this is because of the “double spending” problem presented by digital technology.

For example, when you save a picture on your phone, there is no limit to the number of people you can share that picture with. In other words, it is not the case that you no longer have the picture when you give it to someone else, as is the case when you part with cash via an electronic funds transfer (EFT), sell your house or buy a share.

This is why we need trusted third-party intermediaries, such as banks and clearing houses, to verify digital transactions.

The blockchain, however, does away with the need for this because it is self-policing in that the network verifies transactions automatically.

Having said that, an independent trusted party would be needed to validate that an asset, such as a car or house, in fact exists before it can be loaded onto the blockchain.

In future, Ehsani believes that central banks could issue their own crypto-currencies via a blockchain, enabling them to monitor all transactions and allowing citizens to bank directly with them.

This would need to be a private blockchain where Know Your Customer (KYC) protocols are observed. On public blockchains, such as the bitcoin blockchain, although users are linked to an account number, the individual behind that account number can choose to remain anonymous.


“Blockchain calls institutions to a new paradigm,” Ehsani said.

By definition, a blockchain needs the buy-in of a number of different parties in order to work. If two banks were to establish competing blockchains, for instance, they would then need to be reconciled, which puts us right back to where we are now.

An internal company blockchain could make sense in some cases, as with an intra-net, particularly where it improves the ability to transact with suppliers.

However, for consumers to really benefit, there would need to be industry-wide blockchains or at least blockchains that can talk to each other so that, for example, a consumer can own their own data (be it related to medical history, marriage status or credit record) and store it on a blockchain, with the ability to share that information with a separate blockchain.

“I do believe we will end up with a blockchain for financial markets in South Africa,” Knowles said.

Although the technology is still in its infancy (tellingly, while Visa handles 2 000 transactions per second worldwide, the bitcoin blockchain handles just seven and requires the same electricity needed to power Ireland), interest is on the rise.

While $1 billion was invested into developing and exploring blockchain technology in 2015, $10 billion has already been invested in 2016, Knowles said.


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Not for a long time yet.

What people don’t understand, is that blockchain technology is based upon a single, but distributed “central ledger” to record all transactions. This means that for every transaction, the whole blockchain needs to be updated by “miners”, powerful computers that handle the blockchain processing. Before a transaction can be added, the majority of these “miners” need to have completed their calculation and agreed with each other. This takes time and limits the transaction processing speed.

To give you an example, the current Bitcoin transaction rate is a about 7 transactions per second, while Visa alone handles 24 000 transactions per second. With Bitcoin, about 80% of the processing power of the Bitcoin blockchain, is based in China. Would you trust a number of Chinese companies more than a proper, regulated central bank?

If Central Banks were properly regulated we would not need Bitcoin, gold or rhino horn as means of exchange and money in the bank would have been a safe investment.
Central Banks do regulate the banks but they themselves are not regulated and report to politicians, who are not regulated either. That is why savers are forced to become speculators in property in shares in order to try and protect the purchasing power of their savings.
If blockchain proves to be successful it won’t be long before it will be regulated by some Central Bank because in a system of fiat currencies, governments need to have a monopoly over the issuance of money.

Hi ExpatEurope, thanks for your comment. I agree these developments will take some time. As highlighted in the article, while the bit coin blockchain processes only seven transactions per second and requires the same electricity needed to power Ireland, Visa handles 2 000 (I believe is the correct figure) per second.

All currency is fiat whether it is sitting in a central bank or in Mugabe’s private safe.

“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered. ” – Thomas Jefferson

Very interesting comments by Mr Ehsani – banking directly with central banks.
Hanna do you think this could be the foundation for a global currency?
We’ve already got the Euro.
What about a merging of the dollar, pound and renminbi – with blockchain technology as the backbone?
I believe the banks are planning for something along those lines.

I think MoneyWeb should do a series of articles on banking.
I think people would be interested in knowing how money is created and how the banking system actually works.
Do you think they would consider such a thing?

End of comments.



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