Blockchain technology could be used to bypass today's centralised financial infrastructure entirely, according to a report by BBVA Research US.
The report, titled Blockchain Technology: The Ultimate Disruption in the Financial System notes that the application of blockchain technology would first be useful in the payments space, where it would eradicate the need for any intermediaries and significantly reduce costs for banks.
However, decentralised public ledgers could disrupt the financial system as a whole, adds the report. "Given that the majority of financial assets such as bonds, equities, derivatives and loans are already electronic it may be possible that someday the entire system is replaced by a decentralised structure."
Touching upon smart contracts, the report also noted how being able to register and trade assets on a decentralised register increases efficiency.
Challenges and risks
The possibility of a decentralised public ledger replacing the current centralised system, the report says, also comes with various risks and challenges.
Firstly, a decentralised system would have to offer the same or a higher level of trust and protection than the current centralised financial structure.
For this to happen, the report explains the decentralised system would have to concentrate a "massive amount" of computer power and in turn be able to cope with the huge energy consumption required to support it.
Furthermore, the decentralised system would also have to deal with legal and regulatory concerns, as well as with matters of national security, such as money laundering, fraud, tax evasion or terrorism.
The report notes that digital currencies could also suffer price volatility, which could have sizeable negative effects. "These shocks could generate systemic risk and severe economic downturns ... in this scenario, monetary policy would not be able to respond effectively if it fails to boost demand among a large share of economic agents that use digital currencies."
The risks aside, BBVA Compass believes blockchain technology has a bright future ahead. Its report concludes:
BBVA and crypto
BBVA Research is the economic research department of BBVA Group, but this is not the first time the global Spanish banking group has entered the crypto arena.
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