We're rather techno-optimists around here: largely because we know a bit of economic history. 250 years back the average human was able to consume some $3 a day of current value. Today that's more like $30 and we in the rich countries are doing very much better than that too. All driven by technological advance: sure, that itself incentivised by markets, economic freedom, the price system and getting the institutions right. But it is technological advance which is the direct cause of our current wealth.
However, we're rather less optimistic about the prospects for Bitcoin. We're sure that the blockchain will be used to do some interesting things, although pretty certain that it will be a less clunky version of it which is. Bitcoin itself we don't think is going that far. And we're really pretty sure that it's not about to eviscerate banking:
New technology such as artificial intelligence and blockchainwill utterly shake up the fundamental principles of banking, challenging the entire industry according to former Barclays chief Antony Jenkins.
He believes the innovation in finance could eliminate the need for maturity transformation – the process by which short-term deposits, such as current accounts and instant access savings, fund long-term loans including mortgages.
That is a fundamental principle of the industry as banks can offer a low interest rate to savers while charging more to borrowers, profiting from the gap between the two rates. Yet in 10 to 20 years’ time, he believes the need for banks to perform the function might no longer exist – already some investors are sidestepping banks by using websites to match borrowers and savers directly.
That there will be peer to peer lending we have no doubt about. But look at what the prediction really is: Bitcoin, or alt-currencies, or the blockchain, will wipe out fractional reserve banking. We will end up with a system instead of only 100% reserve banking. That's what no maturity transformation means. And we really do not think that is going to happen.
Simply because that maturity transformation is too damn useful. The desired maturity and liquidity of savings is rather lower than the desired such of borrowers. Thus, somewhere in the system we need maturity transformation. And as Brad Delong likes to point out if you borrow short and lend long then you are a bank: that being the definition of what banking is. Further, if you're not, you're not doing banking.
The blockchain might have all sorts of fun uses but it's not going to replace that basic desire we have for maturity transformation. Thus it's not going to replace banking.