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Elasticity of Taxes
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Advantages of Behavioral Finance
The problem with traditional financial theories is that they tend to operate in an ideal world! The underlying assumptions are that the information available is perfect, the investors are capable of interpreting the information. Another assumption is that there is a single right answer which can be mathematically worked out. However, when investors use this […]
As far as technology enthusiasts are concerned, blockchain is the most important invention since the wheel! It is very easy to find literature where technical gurus are praising blockchain as being the solution to all technology-related problems being faced by mankind. This overenthusiasm is the reason that most people believe that blockchain will revolutionize many industries including commercial banking.
However, this may not necessarily be the case. There are many industries and business cases where blockchain is not the ideal solution. Commercial banking may be one such case. This argument is gaining some traction since the economists at the Swiss Central Bank have stated that they believe that a blockchain-based system is highly inefficient and not suitable for central banking.
In this article, we will have a closer look at the various disadvantages which make blockchain unsuitable to be deployed in commercial banking.
If the commercial banking network were to extensively deploy blockchain-based networks, their energy consumption would be very high! This would be a significant problem since banks, like other corporations, are required to adopt practices that are eco-friendly in nature.
If the entire commercial banking system were to work on blockchain, it would create a large-scale energy shortage. Energy companies would be forced to produce energy on a large scale. This could be a concern for the entire world since it may lead to an increase in pollution and global warming. Hence, unless the energy requirements of blockchain are cut down, it would be impossible to implement this system on a large scale such as in the commercial banking industry.
Any public disclosure is shunned unless it is required by law. Therefore, it is likely that banks may be able to switch over to blockchain when it comes to processes such as “know your customer” verification. However, many corporate customers may not be comfortable with their data being stored on a publicly distributed ledger.
For instance, blockchain-enabled smart contracts are created to transfer money based on certain conditions being met. It is likely that these contracts may malfunction and that money may not get transferred at the correct time or worse it could get transferred to the wrong counterparty! Even though blockchain systems are thoroughly tested for bugs, there is always a small chance that there might be a risk of very expensive failures and such failures may not be acceptable to the stakeholders.
Also, the very large volume of transaction data that commercial banks hold will have to be migrated to the new system. Reconciling all this migrated data can also be very expensive and time-consuming. These extensive costs with no immediate payback make the implementation of blockchain an unviable proposition.
A blockchain-based system requires the participation of several miners. Miners are only interested in the process because they get a fee for their services. The end result is that the maintenance costs rise exponentially. These costs are not offset by the reduced data security expenses and end up increasing the cost of every transaction.
Commercial banks will have to train their employees and customers to quickly adapt to the changes. Such training may be expensive and time-consuming. Also, the learning curve may be quite steep and banks can expect mistakes to be made by these stakeholders. The learning process could be a major inconvenience to various stakeholders.
Hence, it can be said that even though blockchain may resolve some of the problems being faced by modern commercial banks, it may also cause a lot of inconvenience and costs. Commercial banks will have to evaluate these costs against the projected benefits in order to decide whether or not the implementation of blockchain technology is worth it.
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