Will banks like ANZ and Westpac go the way of the record store?
Professor David Yermack from NYU Stern School of Business thinks so. He argues it’s only a matter of time before Central Banks withdraw banknotes from circulation and put the national currency into an electronic blockchain rending other banks “unnecessary”.
The distributed ledger technology promises to give Central Banks much greater control over national currencies and could put an end to money laundering and tax evasion, argues Yermack, who counts bitcoin and cryptocurrencies among his areas of expertise.
“It’s not a question of if but when a country will do this. And my expectation is that the benefits will be so large that all of the other countries will quickly follow suit. Ten years from now you’ll see many Central Bank digital currencies like this,” he said.
Yermack made the prediction during an interview with NYU professor and L2 founder Scott Galloway (see full video below).
“If Central Banks issued digital currencies you won’t have branch banks engaging in fractional reserve banking anymore,” Yermack said.
(Fractional reserve banking is a banking system where only a fraction of bank deposits are backed by cash on hand and available for withdrawal.)
“In other words your paycheck wouldn’t be deposited into Bank of America or JP Morgan Chase it would go into an account at the Federal Reserve. Everyone would just bank at the Central Bank.”
Like record stores banks “won’t disappear but will be greatly reduced.”
“They will preserve some parts of their businesses. But you’ll see many defensive mergers and consolidations of the financial services industry, banks, brokerages, exchanges and so forth.”
Speaking from a US perspective, Yermack argues that wouldn’t necessarily be a bad thing.
“It’s worth remembering that these banks all failed multiple times and required taxpayer bailouts. And you wouldn’t have to worry about any of those kinds of disruptions in the future either as a taxpayer or as a customer.”
Yermack argued many banks are investigating in blockchain technology but are only doing the “bare minimum.”
“Many of them are really reacting from a defensive posture that they realise this is a technology that cuts out the middleman. You know if you do international remittances you can do it with Ripple and maybe not need the network of banks on the Swift network.
“So I think many of the people in industry are trying to do what I would call the bare minimum to co-op this into their business models in such a way to protect the franchises.”