Finance has been digital for years. Instruments ranging from bank deposits to currency swaps to structured debt obligations have long been recorded and traded electronically. But money and payment systems, the underpinnings of all financial activity, are still traditional in one respect: They rely on central third parties — banks — to record and vouch for transactions.
Digital currencies dispense with this. They create a decentralized record — a “distributed ledger” — which allows buyers and sellers to interact directly.
Bitcoin, the best-known of these currencies, has commanded attention for the wrong reason — as a speculative asset. It’s tiny measured by users or transactions, and there’s no guarantee its use will spread. It has already suffered serious glitches and aroused the concerns of regulators. All this obscures the crucial point. Digital currencies have shown that the distributed ledger is feasible, and that’s a spear pointed at the heart of traditional banking.
The other core functions of a bank — borrowing and lending — are also coming under technological pressure. New startups are matching borrowers and lenders in online marketplaces. It’s the eBay approach to credit: Loans can be originated faster and at lower cost. Big data is being harnessed to make credit scoring cheaper and more accurate. Banks have been slow to seize this opportunity; the new technology is giving nimbler nonbank lenders a competitive edge.