Beyond Bitcoin

Crypto-currencies may be disruptive, but they’re also potentially inspirational. Discussing the hype currently surrounding Bitcoin et al, Professor Jem Bendell, director, Institute for Leadership and Sustainability, University of Cumbria, says, “Crypto-fame helps more people understand that currency systems are things we can design, rather than just take for granted. That’s empowering a new generation of people, many of whom are not simply motivated by financial return but want a fairer and better world.”

Idealists and entrepreneurs gave us much of the internet and social media; now many of them are working on crypto-currencies. Bendell continues: “The current talk is about disruption, and yet we should speak of positive transformation in the relationship of banking and the economy.”

There may be challenges associated with crypto-currencies today, but there’s also “a new generation”, as Bendell puts it, working to turn those challenges into opportunities. Adam Shapiro, director, Promontory Financial Group, says: “The banks that are going to do well in this brave new world will look past the current noise about Bitcoin. Instead, they’ll ask themselves: given the power of the underlying technology, what are the threats and opportunities it creates for our specific business?”

The advent of crypto-currencies could herald an opportunity to level the playing field. Shapiro also says: “If we’re looking at how technology can enable banks to disrupt markets where they’ve been priced out in the past, the much greater automation inherent in digital currencies potentially presents great opportunities for banks as the technology develops.”

So this is how we turn the whole issue on its head. Crypto-currencies may threaten to disrupt banking business, yes, but banks can just as effectively use crypto-currencies to disrupt, let’s say, the remittance business. Wim Raymaekers, head of banking markets, SWIFT, observes: “Even in the world of crypto-currencies, we are seeing intermediaries appear; there is an eco-system of providers.”

This may be a sign of early maturity, but it’s also an unequivocal indication that there’s an opportunity here. Banks can stop being defensive and start being pro-active; those early intermediaries can offer many services, but in the long run, they can’t offer the security, the reach or the credibility to counterparties that banks can offer. The tide has turned in our favour.

Early days But let’s not get carried away with our own hype either. The underlying technology of crypto-currencies may add value to banks’ capacity to offer secure intermediation, and they may enable banks to offer services that in the past they’ve found infeasible for cost and/or other reasons, but these are still early days. Bendell says: “The ledger systems, the currency units, the forms of issuance and the governance of the current generation of crypto-currencies are flawed, and so the current generation may not be the ones that succeed long term.”

Note also here the distinction that is now widely made between the individual crypto-currencies themselves and their underlying technologies. We’re no longer talking about, for example, that high-profile currency unit represented by a gold-coloured coin with a big B on the front; we’re talking about the whole of the technology that lies behind all of them. Peter Vander Auwera, co-founder of Innotribe, SWIFT, says: “It’s not about the coins. It’s not about the currency. It’s about the protocol.”

Before we go too far forward, let’s take a step back. Shapiro defines crypto-currencies in three ways. “First, it’s an alternative store of value. Secondly, the technology offers the potential for cheap, fast and global payments transactions where businesses and consumers can choose whether or not to use financial intermediaries. That is a very powerful technology and it’s good for banks to engage with it as they think about how they can ensure that they are the beneficiaries of disruption rather than being disrupted,” he says. “The third thing, which is much less developed but still interesting, is that crypto-currencies have solved the problem of how to prove unique ownership of a digital asset.”

Now, this is thought-provoking. Richard Brown, executive architect, industry innovation, banking and financial markets, IBM UK, says: “Leave aside the value of Bitcoins, and think of them as scarce digital tokens. There is a limited number of them, and there is a ledger that allows you to prove and transfer ownership. There is nothing to stop an issuer asserting that a particular set of Bitcoins represents ownership of a particular set of securities.” And we’re not just talking about the ownership of conventional securities. Udayan Goyal, founder and managing partner of start-up investor Anthemis

Group, says: “Any two parties in agreement can use this technology to track anything which can be recorded. The ledgers become tamper-proof, transparent and have very light computational requirements in comparison to other traditional two-sided ledger systems.”

Source of inspiration Brown concedes that there are still obstacles to the development of such ‘digital bearer bonds’ – his term – but like Bendell above, cites the quality of the people working to remove those obstacles. Brown says: “My starting point is that there are a large number of really motivated, well-funded and thoughtful people working on this. Anybody interested in international payments, securities custody or even the financial implications of the internet of things should pay attention.”

They shouldn’t just pay attention, Brown continues, because all those clever people are removing obstacles, nor indeed because of specific opportunities, but because the work being done in this space is itself “potentially a source of inspiration”. This discussion is unusual in that it’s about ideas that people haven’t had yet; the practical implication of this is that we can’t be prescriptive in our expectations.

Bendell says: “For banking professionals to look at currency innovation from the narrow perspective of protecting or growing business would be a form of normalised insanity. Instead, we need to come together to analyse the kind of banking that is compatible with, and supports, a restored environment, thriving real economy, and social cohesion.”