Why do people keep their money in banks? Because they can (i) trust the bank for safekeeping (ii) avoid the trouble of dealing with paper currency (iii) make electronic receipts, payments and transfers (iv) have a record of transactions (v) jointly use the fund with other parties (vi) have access to loans based on history of transactions. Of course, this comes at a cost. Would people keep their money in banks, if they can get higher convenience and same benefits at a lower cost? A similar question was asked about the retail industry a couple of decades back and Amazon came calling with an answer.

The outlines of the answer to our rhetorical question are already emerging. Cryptographic token and smart contract technologies are getting ready to disrupt the banking industry as we know it today. Faced with customer choice, regulatory walls will offer little protection to the banking industry in its current form. With the advent of distributed ledgers and smart contracts offered by blockchain, several regulatory mechanisms will turn archaic. Why would people need federal government to guarantee their deposits if deposits stay in people’s own custody?  If people can transparently govern collection and investment of their monies using smart contracts, do they still need the same legal protections? Why would state or federal governments need to validate deposits held by money services businesses if people can directly query the accounts, validate smart contracts and make a reasonable choice? Clearly, we expect huge economic efficiencies from adoption of these technologies.

Of course, for the above scenario to turn into a reality, we are assuming a significant progression in the development of blockchain, smart contracts and related laws, which will have to include (i) development of a cryptographic currency  that can be trusted to maintain a stable value (ii) strengthening of international laws against hacking (iii) using blockchain to track identity and maintain vital records (iv) trusted exchanges between on and off-blockchain facts (v) laws and technologies prohibiting collusion among miners or public ledger-keepers (vi) blockchain community’s focus on customer convenience (vii) methods for safekeeping of private keys (viii)  reduction in the cost of transactions and data storage on blockchain (ix) blockchain analytics (x) trusted directories of public addresses (xi) change in banking and money services business laws to encourage use of cryptocurrencies (xii) insurance against hacking of digital wallets (xiii) governance of blockchain forks, pruning, archiving, etc. (xiv) professional auditors, who would audit and certify understanding of smart contracts (xv) regulatory support for on-chain purchasing and trading of securities. This list is in no particular order and certainly not comprehensive but the good news is that several initiatives to address these challenges are already in progress.

PS: This is my personal point of view.