Banks Can’t Afford to Ignore Bitcoin’s ‘BitTorrent Effect’
Today, major banks are touting their mobile banking apps as the next best thing. But are these “innovations” or just renovations on the proverbial deck of the Titanic? And similar to how BitTorrent impacted the entertainment industry, would incumbent banks have remained complacent without a prod from Bitcoin?
Also read: Goldman Sachs Admits Bitcoin is ‘Ideal Vehicle’ for Public Transactions
The BitTorrent Effect
BitTorrent is to file-sharing as Bitcoin is to money, the analogy goes. Prior to the advent of this file-sharing technology, platforms like Napster and Kazaa were relatively easy and straightforward to shut down. File a lawsuit, knock down some doors, shut down some servers, and the incumbent lives another day.
Then came BitTorrent.
Its decentralized peer-to-peer (P2P) file sharing model forever changed how files were shared and distributed online due to its architecture that made it immune to shutdown. BitTorrent quickly became one of the most common protocols for transferring large files, propelling P2P networks to surge in popularity. In fact, P2P file sharing collectively made up approximately 43% to 70% of all Internet traffic as of February 2009.
Simply put, what the BitTorrent protocol managed to do was circumvent copyright laws — which many would argue served as the glue keeping the media monopoly in tact. As the internet revolution took hold, media consumption — a major part of which was driven by this “illegal” file-sharing — was forcibly pushed online.
This forced the behemoth entertainment industry to step up their game. Since they were no longer playing by their rules, the only options were to go down with the sinking ship or update their distribution model and adjusting prices accordingly to meet consumer demand.
Many popular services like Netflix, HBO on Demand and Hulu would probably not exist today if the BitTorrent protocol didn’t succeed where Napster and Kazaa failed. Their continued growth in the share of internet traffic reflects the fact that consumers are willing to pay for better products.
BitTorrent is a clear example of technology enabling a free market to exist even when it’s corralled and suppressed by giants. Its market share has dwindled since and the golden age of large record labels and movie studios is waning as new forms of media consumption and distribution emerge almost daily, in an easily-consumable app.
Biting Bitcoin’s Playbook
If the analogy is correct, Bitcoin will do the same to banking and finance. Banking licenses, regulations and the fiat monetary system as a whole are asphyxiating the economy. But change is already happening. As disgruntled banking customers wait days for their deposit checks to clear, banks are already taking pages out of Bitcoin’s playbook.
Bank of America, for example, has embraced mobile banking in recent years, offering its customers mobile banking in an app as well as digital check deposits (akin to scanning a QR-code for Bitcoin users). Then there’s Wells Fargo, which offers what they call “Text Banking” to “quickly receive account information by text message,” along with the ability to pay bills, transfer funds, and even get direction to the nearest ATM.
This type of innovation renovation would of course be laughable to anyone who has used even the most basic Bitcoin wallet. Moreover, numerous Bitcoin and Fintech startups are already offering services where major banks fall short.
3 Ways Bitcoin Beats Banks
Banks claim to “take security very seriously” with BoA touting their number one ranking on the homepage. First, the security risk of banks’ storing your personal information on their centralized servers is a structural flaw in an outdated model. Just ask SWIFT.
In contrast, a hacker must crack individual Bitcoin wallets one-by-one to move the unknown funds inside. Moreover, in the case of DDoS attacks, the network is shielded by its Proof-of-Work protocol and not by the blockchain contrary to popular belief. Thus, the incentive for going after the so-called bank’s “honey pot” — where thousands of accounts are kept in one place — is way more attractive for hackers by comparison.
Second, Bitcoin wallet apps all display your balance, allow you to send and receive money, showing your transaction history to boot. Some have additional features like merchant maps, integrated discounts at Starbucks, for example, and multiple-signatures, which serve as an escrow service, as well as pseudonymity and anonymizing features for real privacy.
Third, your bitcoin funds are not associated with your real identity. This is a deliberate design feature in Bitcoin to protect users from identity theft and fraud, a problem that’s plaguing the traditional banking industry. To wit, banks’ Know-Your-Customer (KYC) guidelines actually expose customers to identity thieves instead of protecting them.
In other words, a Bitcoin wallet app is not a banking app. It is a bank. A better one.
Disruption Brings Better Products
Bitcoin and decentralized cryptocurrency in general will enable new leaner and more versatile startups to always be a step ahead of lethargic legacy banks, while providing open-sourced innovation, greater transparency, and financial services 24/7.
Fun fact: Bitcoin has never shut down since it was launched in 2009. Unfortunately, the same cannot be said for banks.
Paradoxically, this will force the banking industry to play catch up as Bitcoin will continue to exist just like BitTorrent. It will adapt and evolve. And yes, it will give rise to further innovation. But in the meantime, it will serve as the baseline, forcing incumbents to choose between being disrupted or providing better products and service.
Do you agree with the BitTorrent analogy? Are banks scrambling to play catch up with Fintech? Let us know in the comments section below!
Images courtesy of digitaltrends.com, Wells Fargo, Shutterstock, rt.com