Banks are going wild for the blockchain, the technology first invented to underpin bitcoin.

Also known as "distributed ledger" technology, blockchain uses complex cryptography and a wide network of duplicated ledgers to let people transact directly with one another online without going through a middleman.


Transactions must be signed off by both parties and record cannot be changed once a deal completes.Finance firms believe the technology has the potential to strip out a huge amount of cost by speeding up transactions and removing the need for people to work through a clearing or settlement house.

Santander has estimated $20 billion worth of savings can be made using the technology and Goldman Sachs claims the technology could revolutionize "well, everything."


But Citi warns that there's a risk the technology could also reduce banks to just "dumb pipes" - simply infrastructure providers who let more nimble fintech startups funnel money around, deal with clients, and, as a result, take home the bulk of fees.

In this scenario, it is the fintech businesses who can make the best margins given their client relationships at the expense of big banks.


Citi's Keith Horowitz writes in a recent "Citi GPS" note:A report by the World Economic Forum released in June 2015 said "decentralized systems, such as blockchain protocol, threaten to disintermediate almost every process in financial services".

One argument is that as the technology firms develop blockchain solutions, there is a risk that banks could be relegated to becoming "dumb pipes," forming only the infrastructure through which money flows, but with most of the benefits accruing to service providers.

This scenario represents an occurrence similar to what happened with the telecom industry, where the rise of the Internet allowed for competition in what was formerly a highly regulated industry. Innovations like VoIP enabled tech companies like Skype to benefit from the existing physical infrastructure.


Horowitz isn't the only one to compare the current financial technology boom to the overhaul of the telecoms industry in the 199os.

Juan Lobato, co-founder of online business finance startup Ebury, told BI in November: "Technology is disrupting all areas of finance. I was quite active in telecoms in the 1990s. The same thing happened there - new technology enabled things to be done very differently with a very different cost structure."

While Citi flags the risk that banks could be sowing the seeds of their own downfall with blockchain, the bank doesn't actually think they'll become just "dumb pipes."


It presents three arguments as to why, two of which hold up and one that seems a little suspect.First, Citi says "banks have a very valuable asset in the form of their large identifiable customer-base." That's true. It's much harder to win new customers than it is to keep them and the banks will work very hard to keep their customers.

Secondly, banks have "unmatched experience when it comes to handling burdensome financial regulation." Again, that's certainly true. Many fintech companies benefit from the fact that they are currently unregulated or too small to face any meaningful regulatory burden. But if the sector is to thrive and grow it will have to come to terms with regulation - something banks have been doing for years.


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But Citi's third argument is that "banks benefit from a relatively strong track record of safekeeping assets, and therefore have earned a certain amount of trust and credibility." Given that banks are still fessing up to billion pound fines almost weekly, the words trust and credibility are probably not the first you'd associate with large banks these days.