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Can Bitcoin actually remove the middlemen from corporate finance?

If you’ve been involved with blockchain for a while, you may have picked up on a recurring theme in many recent news stories — something along the lines of ‘blockchain is the future,’ ‘it will only continue to grow in the coming years’, and ‘it will revolutionize corporate finance by de-centralizing lending and removing the need for middlemen.” Are they right? Currently, there are two dominant perspectives on that.

This week’s news that Bitcoin has finally broken the $10,000 mark has led to an explosion of opinion pieces. Alongside the inevitable articles in Ars Technica and Forbes, a host of news outlets who rarely cover cryptocurrencies are now wading in with opinions. In part, this is due to a simple fact: blockchain can no longer be ignored, even by conservative observers. There is now so much money tied up in it that even large corporations are taking it seriously.

If you’ve been involved with blockchain for a while, you may have picked up on a recurring theme in many of these recent opinion pieces — something along the lines of ‘blockchain is the future,’ ‘it will only continue to grow in the coming years’, and ‘it will revolutionize corporate finance by de-centralizing lending and removing the need for middlemen.” Are they right? Currently, there are two dominant perspectives on that.

 The utopians

Those involved with blockchain are certainly good at talking it up. The range of problems that it’s claimed cryptocurrency is the solution for is huge — everything from allowing small businesses easy access to finance, right up to overthrowing corrupt regimes. When it comes to corporate finance, the claims are no less impressive. As the Tapscotts wrote in the Harvard Business Review (albeit before their own financing disaster), our financial system is hopelessly inefficient, and in need of serious disruption.

As they put it, “the system is rife with problems, adding cost through fees and delays, creating friction through redundant and onerous paperwork, and opening up opportunities for fraud and crime,” The statistics support their assertion, with PWC noting in a 2014 Threats to the Financial Services Sector report that fully 45% of financial services companies had suffered economic crime during the year.

For blockchain believers, the reason for this hopeless inefficiency is clear enough — the current system of corporate finance is antiquated, relying on an uneasy marriage between digital technologies and processes that remain, at their core, paper-based. As a result, even the largest financial institutions rely on a huge array of third-party companies and individuals for even the simplest financial transactions.

Getting rid of these middlemen is certainly desirable, and could save institutions and businesses billions a year. European bank Santander, for example, put its potential savings at $20 billion a year, while consultants Capgemini estimates that consumers could save up to $16 billion in banking and insurance fees through using blockchain.

For startup financing, the potential of blockchain may be even more disruptive. Until recently, raising the capital for a new venture involved targeting a small group of high-value, adventurous investors. Now, Initial Coin Offerings (ICOs) are routinely raising millions for new businesses, with the vast majority of this money coming from small investments by individuals.

The skeptics

Despite its clear potential for disruption, many remain skeptical about the future of blockchain. Some of these criticisms are valid, and some less so. There is a strain of opinion, given fresh impetus by the rapid increase in the value of Bitcoin, that sees the whole endeavor as a repeat of the South Sea Bubble, or the Dot Com crash. This is the tone struck in last week’s Guardian editorial, which claims that blockchain has “has produced one of the most astonishing outbursts of irrational exuberance in financial history.”

Such a position correctly points out that the value of blockchain, as with a large proportion of the financial system more generally, relies on the confidence of investors that the currency will continue to gain value. The problem, however, is that skeptics of this type assume — with little to no evidence — that a crash is inevitable. Crashes make the news, and successes don’t, and this gives rise to confirmation bias in the predictions of those not intimately involved with a new technology.

A far more informed strain of skepticism relies on the observation that many in corporate finance are simply not ready for blockchain. Research done by the Association for Financial Professionals, for example, found that currently only 11 percent of the 279 finance and treasury professionals polled said their organizations were "fully" or "very" prepared for blockchain, IoT and robotic process automation. More than a third said their organizations were minimally prepared or not ready at all.

This is worrying in itself, but also has direct consequences for the potential of blockchain. When these companies finally realize that they need blockchain processes, they are unlikely to develop them for themselves. Instead, they will rely on the people that blockchain promises to remove — the middlemen.

The new middlemen

Take a look at the most recent blockchain news, and a strange pattern emerges. More and more large financial institutions are gearing up to take advantage of the technology, but very few are developing their own systems in order to do so. Sure R3’s Corda project has a big consortium of banks behind it — and has just rolled out version 2.0 — but how many of those banks are actually ready to start working with it?

Though welcome, systems like this also illustrate that, at least at the moment, a central claim of blockchain is unlikely to be realized: instead of removing middlemen, systems like this actually add another level of bureaucracy and management to an already bureaucratic system.

This is why both the utopians and the skeptics are wrong. With so many huge financial institutions already invested, it is hard to see a bitcoin crash coming anytime soon. On the other hand, the idea that the technology will radically change an individual’s relationship to financial organizations is similarly flawed.

If Bitcoin and the blockchain do indeed represent a disruptive shift of power over corporate finance, this power will flow towards a new breed of middlemen: those who already have expertise in the technology, and who are able to build systems that can mediate between individuals and corporations. These middlemen will be different, but they will still take a cut.


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