Banks Should Be Terrified of Cryptocurrencies
Since the financial crisis, JPMorgan Chase has been America’s leading bank.
With $3.2 trillion in assets under management, the banking behemoth is the seventh- largest bank in the world.
For the past 15 years, the house of Morgan has been steered by Wall Street veteran Jamie Dimon, the most powerful banker of his generation.
When Dimon speaks, the rest of the financial services sector listens.
That’s why everyone took notice when news broke that Dimon had sent his deputies a list of global banking competitors to keep an eye on.
But this wasn’t the list you’d think it was.
Rather than traditional banks, Dimon is worried about fintech startups such as PayPal, Square and Stripe.
He also mentioned tech giants Amazon, Apple and Google as potential threats.
This might seem obvious. Tech is increasingly becoming more integrated into our daily lives.
Data is the new oil: It’s the most valuable resource on Earth and is quickly becoming the lifeblood of our financial system.
You see, information is the core component of banking. Those who hold the information are able to better assess the risk of lending and investment decisions.
The information gleaned from online spending habits can help lenders make better lending decisions.
Driving data helps auto insurers underwrite premiums.
And Google searches help hedge funds find the next hot startups to invest in.
That’s why Dimon remarked: “Absolutely, we should be scared s—less about that.”
But it’s not the risks banks see coming that they should be afraid of. It’s the ones they don’t.
That’s because blockchain-based financial services are growing exponentially, posing an existential risk to the current banking system.
Cryptocurrencies Get Rid of Gatekeepers
The biggest breakthrough of blockchain is that it provides a way to track and authenticate digital value.
That means we can create digital tokens and transact them without needing an intermediary (like a bank) to prove that the digital token is not a copy.
Think about it this way: If you own Apple stock and want to sell it, you need to go through a banking intermediary such as TD Ameritrade or JPMorgan Chase.
These banks are the gatekeepers — they store your wealth and let you transact it (for a fee, of course).
But cryptocurrencies get rid of the need for a digital gatekeeper.
Bitcoin is the world’s first digital bearer instrument. Whoever holds the bitcoin has access to its value.
There is no bank that keeps track of your name, address and how many bitcoins you own. You prove ownership simply by spending it.
What’s more, cryptocurrency owners are able to self-custody these assets.
Cryptocurrencies don’t need to be stored in a bank. They can be stored on your personal computer or on an external hard drive.
Think of it like having a gold bar with digital properties.
Rather than having to be buried in your backyard — thus making it unspendable — a cryptocurrency can be hosted on a mobile phone and readily spent when needed.
This property of self-custody is key. It allows for a new type of finance called decentralized finance, or DeFi for short.
An Existential Threat to Traditional Finance
With self-custody, the owner of the asset can perform the role of a bank — lending digital assets out, staking them to provide liquidity for trading or even using them as collateral to borrow or for insurance.
In each of these DeFi endeavors, the cryptocurrency owner gets paid a fee just like a bank does.
This would mean the fees that banks typically make go directly to the owner of the asset. The role of banks in traditional finance is completely wiped out.
Banks become unnecessary. They are replaced by computational protocols that govern lending, borrowing and trading.
Jamie Dimon might be worried about fintech startups, but he should be terrified of decentralized finance.
My career on Wall Street started while I was in college. I spent a summer interning for Merrill Lynch in the middle of the ‘90s bull market. I was fascinated with trading, and as a result, after college, I joined Salomon Brothers in the famed mortgage bond trading department. Later, I spent time at Citigroup working with credit derivatives. Eventually, I needed to walk away from the excess of Wall Street. That’s when I joined Banyan Hill in 2017. Now I help readers get ahead of the market and build their retirements.