Imagine a world without banks or other financial intermediaries.
This is the vision of Andrew Keys, the founder of ConsensSys Capital, a venture capital firm that promotes the development of decentralized blockchain services and applications, which states that smart contracts on Ethereum could essentially take the place of banks.
It supports the role that banks play in providing identity and reputation verification and acting as a reliable third party for entities that do not trust one of the other can be managed by the software.
"The concept of being a trusted intermediary to process payments to, say, a high rate or to control transactions – everything will become automated and commodified," Keys said last week at an event called Democratizing Finance held at the Boy's Museum . "People will still need financial services and people will still need experience, but the added value will be higher in the stack", for example, in providing financial advice or liquidity.
But not everyone is still sold on this concept.
"For better or worse, people outside the blockchain bubble do not trust the technology of distributed registries, particularly when they merge with cryptocurrency," said Alex Jimenez, vice president and senior strategist of Zions Bancorporation.
Although he agreed with Keys' general thesis, he emphasized that blockchain technology has problems of scalability and overrun of inertia that have yet to be addressed.
Firoze Lafeer, chief technology officer at the small business lender Fintech Breakout Capital Finance and former head of Capital One Labs, agreed that the end of the banks has not yet arrived.
"While many financial transactions could soon be done with blockchains and smart contracts, brokers are here to stay," said Lafeer. "The move to blockchain and smart contracts does not eliminate all the risks of financial activity.There is a role for banks and other companies that understand how to quantify and monetize the risk in this business.In fact, I would say that we will discover new and stronger opportunities for intermediaries in this sector ".
However, a closer look at ConsenSys' ideas and the debate they have raised could prove invaluable to the financial sector. The technology of distributed accounting books is attracting the talent of developers, corporate sponsorship and dynamism. ConsenSys itself, which has grown to over 1,100 employees, is gaining ground in financial services. In September, he collaborated with 15 banks, including Citigroup, ING and MUFG Bank, to create a company called komgo that is building applications of Ethereum to digitize the trading and financing of commodities.
A world managed by smart contracts
Smart contracts are self-executed contracts with the terms of the agreement between buyer and seller directly written in lines of code. The code and agreements exist through a distributed and decentralized blockchain network. Legal contracts can be transformed into smart contracts, with clauses made automatically by the software: if X happens, then make a payment from Y to Z, for example. A startup that creates smart contracts for companies is OpenLaw.io.
Smart contracts can be controlled by software rather than by humans.
"Then you do not have to trust these big brokers," Keys said. "You start to remove friction and improve liquidity.You could have retail labor contracts.You could have a food brand that users would not be able to use to buy cigarettes or alcohol, because that's part of the logic of these smart contracts ".
In theory, an intelligent contract can be part of a bank's work. For example, to obtain a letter of credit from a bank to start drilling into a new site, an oil company should dig into the site, send samples to a test laboratory, and if the laboratory has verified that there was oil in the rock, the company would then begin to turn to a bank for a line of credit.
"That process would last about a year, including excavation, sending samples to the lab and applying the credit line," Keys said.
Using an intelligent contract, laboratory approval could automatically activate a letter of credit, cutting about six months out of the process. A bank would still be involved, but it would no longer be the intermediary. It would be a liquidity provider.
"Banks will need to research the soul of added values as well as being the trusted intermediary," Keys said.
Consumers are also part of ConsenSys vision. Instead of accessing Facebook, Google, PayPal or online banking, consumers will use custom open source browsers that will interact with smart contracts. These browsers will be protected by biometric authentication and will be used to store digital resources such as dollars, cryptocurrencies, reward points and medical records. They will also keep pieces of the user's digital reputation, such as Uber and Airbnb ratings.
Consumers can decide what to store in their browser, what they want to deliver to another party for custody and what data they want to disclose to third parties, such as elements of their digital reputation for due diligence.
Proponents of such ideas argue that it would give consumers more control while being safer than the current system.
But smart contracts are not at risk. Although no blockchain has ever been directly infringed, smart contracts have been compromised. For example, the DAO was an autonomous and decentralized venture capital fund that was based on smart contracts based on Ethereum. Literally he had no employees, no executives or boards of directors. Some users have exploited a vulnerability in the DAO's intelligent contract code that allows them to subtract one third of DAO's funds from a subsidiary account.
Keys reported this incident to the Ethereum software which is still "in the first innings". The software itself and the ability to monitor and control will improve over time, he said.
Another problem with smart contracts is that consumers are already struggling to manage their private keys and passwords. It is difficult to imagine the typical American being able to protect all his data and resources with private keys.
For this reason, Keys sees some people paying an intermediary to take digital resources into custody.
There will be a persistent, and perhaps increasing, need for lawyers, as there are inevitably intelligent contractual disputes. Lawyers will have to understand IT, Keys said. Already large law firms are hiring people with computer science and legal qualifications.
Keys predicts that smart contracts will have an impact by the first quarter of 2020 and that one-tenth of the US gross domestic product will be on a blockchain by 2025.
Others do not see it so quickly.
"In the end we will see more types of transactions made directly through smart contracts, routed more efficiently and as part of an automated process that will ensure proper controls and obligations when funds are transferred," said Brad Leimer, co-founding venture capital and Unconventional Ventures consulting firm; previously he was responsible for innovation at Santander U.S.
"But will it soon dominate the monetary movement to disintermediate the existing tracks in every particular geography? I do not see this happen very soon."
There are too many actors involved, many of whom are still in the exploratory phase of the distributed ledger and intelligent contract technologies, Leimer said.
"I would expect that iterative intelligent contracts simply represent an evolution of the global revolution in payments and money movements that we are already observing," said Leimer. "Global banks and monetary networks will not be eradicated from this equation at any time".
Ethereum is one of several types of distributed ledger technology with which financial services players, fintechs and startups have experimented. Others include Hyperledger, which Northern Trust used to build one of the few blockchains of financial production services out there; R3; and proprietary technologies such as Ripple's distributed payroll for cross-border payments. All of these have dozens of members and customers of financial institutions.
One thing that Ethereum is doing is its ability to execute smart contracts. Another is that there are standards built around Ethereum for identity, reputation, digital tokens and exchanges.
Behlendorf sees companies gravitate towards private, or "consortia", blockchains such as Hyperledger projects that can adopt regulatory and confidentiality requirements rather than public blockchains such as Ethereum.
"No one is saying that the public will go away, they still have to understand what the real utility is as well as being a casino, which is a bit like they are now," he said.
According to Behlendorf, it is not possible to bet the farm on any type of blockchain technology.
"No one has the right answer outside the gate, nor should anyone be expected to," Behlendorf said.
Kill the intermediaries
Since companies started meditating on the uses of blockchain technology, it has been hypothesized that it could be used to knock out intermediaries, such as exchanges, clearing agents and banks.
But some of the largest financial services brokers, including DTCC and Swift, were among the first to jump on the blockchain bandwagon. The DTCC is putting its Trade Information Warehouse for credit derivatives on a distributed ledger; this month 15 major global banks have begun to conduct acceptance testing of technology users. In March, Swift announced that it had conducted a concept test with 34 member banks to reconcile our accounts used to facilitate foreign exchange and trade transactions using a distributed ledger.
Keys said the roles of these central actors will evolve.
Behlendorf said that the use of blockchain technology is growing, financial intermediaries should expect their margins to be threatened.
"Any place where you make money based on the fact that you're a central actor will require a dramatic makeover," Behlendorf said. "It's less important to reward the centralisers, those who can manage large data stores or large networks, and more to reward cooperative organizations networks." You're more at risk if you're Swift or DTCC than you are if you're one of their members. . "
The editor of Large Penny Crosman welcomes feedback on [email protected]