Blockchain Technology: Revolution or Evolution?

Although distributed ledger technology has the potential to eliminate the need for financial intermediaries, recent events suggest that may not happen.

Blockchain, it seems, is on the ascent. Last month the Bank of England and the Bank of Canada both expressed interest in distributed ledger technology, saying that the advancements brought about by fintech look promising for central banking. That came on the heels of a report by Goldman Sachs in late May touting the technology’s cost-cutting potential, estimating that it could save billions of dollars a year through greater transparency, accuracy and security. Late last year Goldman, along with eight other major investment banks, backed the blockchain tech start-up R3 CEV. (Goldman Sachs also backs Kensho.)

That blockchain technology, which was launched as an integral innovation of the cryptocurrency Bitcoin back in 2009, has gained such prominent supporters is a testament to this technology’s staying power. And if blockchain can offer these benefits to central banks, how will it improve peer-to-peer transactions, one of the hallmark advancements of finance technology? Does blockchain’s ascendance herald the beginning of an era in which we no longer need financial intermediaries?

In some ways the answer seems to be yes, as distributed ledger technology has the potential to streamline inefficiencies in transaction settlement. Furthermore, it has implications on the individual level as blockchain provides alternative means of security for transactions of all sorts, especially peer-to-peer transactions, which are already starting to take off. For example, there is M-PESA’s success in Kenya. The mobile money transfer service allows millions of Kenyans to use a cell phone to route cash to another person, eliminating the need for middlemen. As of March 2015, M-PESA had more than 20 million users in Kenya, with another 7 million in Tanzania.

The service, however, recently shuttered in South Africa, where it was unable to gain traction, likely due to South Africans’ greater access to banks. To use an example from the developed world, the peer-to-peer transaction company Lending Club has faced much difficulty in the past few months. Its stock price tanked after its founder and CEO resigned in May, effectively admitting what amounts to an accounting scandal.

Certainly, there is no doubt that fintech is going to bring change to every corner and crevice of the financial ecosystem — “There is more than a whiff of revolution in the air,” Bank of England governor Mark Carney would have said last month, according to prepared remarks that were canceled because of the death of British MP Jo Cox. But Carney’s statement and the rise of blockchain and the peer-to-peer transactions it facilitates raise the biggest question facing fintech in the long run: Will companies disrupt or collaborate with existing financial institutions?

In his undelivered speech, Carney would have argued that fintech could bring about a revolution and a restoration, ultimately yielding something like a reformation. Some disruptors, like the small-business lender OnDeck Capital, have had considerable success, but even this financial upstart joined forces with an industry mainstay (JPMorgan Chase) to further its business prospects. If investment money is any indicator, the industry is favoring collaboration with major existing financial institutions — not disruption. According to a recently released Accenture report, collaborative fintech companies’ funding grew 138 percent year-over-year in 2015. At their current pace blockchain and other fintech innovations are leaning toward evolution rather than revolution. Either way, the industry marches ahead.