How Banks Can Cash In On Bitcoin

PayPal stepped in when banks failed to make it easy to make payments and money transfers over the Internet and more recently Square was created to meet unmet demand from small businesses.

“These were disruptions in a way but they still enable transactions on the old railroad tracks,” says Jon Matonis, a scheduled speaker in the Innotribe track at Sibos and executive director of the Bitcoin Foundation.

Bitcoin doesn’t just threaten banks, it offers great opportunities

The block chain technology that underpins Bitcoin introduces entirely new rails and the possibility of transforming the way everything of value is traded, making it “without a shadow of a doubt the most important fundamental innovation in financial services in 25 years,” says Eric Van der Kleij, another scheduled speaker in the Innotribe track at Sibos, an annual banking conference, and a co-founder of both Level39, a London-based fintech accelerator located in the Docklands, and Innovate Finance, an association formed earlier this year to represent the UK’s rapidly-growing fintech sector.

Innovate Finance, along with other industry conveners, is trying to help the sector develop policies around cryptocurrencies and influence government officials.

George Osborne, Britain’s Chancellor of the Exchequer, showed up at Innovate Finance’s launch in London in August and was photographed using a Bitcoin ATM to buy the cryptocurrency, just one of the many increasing number of signs that Bitcoin has grabbed the attention of politicians and central bankers.

Bitcoin expert Garrick Hileman, an economic historian at the London School of Economics, points out that as radical as block chain technology sounds, it isn’t so different from a world envisioned in 1963 by American economist Milton Friedman in a book he co-wrote called The Monetary History of the United States, 1867-1960.

Banks Should Figure Out How To Use The Technology To Their Advantage

The book attributed inflation to excess money supply generated by a central bank and suggested replacing central banks with computers.

Rather than spending their time hiring lobbyists to try to convince governments to legislate against cryptocurrencies and the block chain — a strategy that didn’t work out so well for the music and telecom industries when the likes of Napster and Skype came along — banks should figure out how to use the technology to their advantage, say industry observers like Adam Shapiro, a scheduled speaker in the Innotribe track at Sibos and director of Promontory Financial Group.

He and others argue that the block chain doesn’t just represent a threat to banks — it offers opportunities.

The block chain serves the ledger function that banks provide today but in the cloud and at a fraction of the cost to consumers and businesses.

So banks could, for example, make intra-banking transfers more efficient and cheaper by using block chain technology at the transport layer, with the SWIFT messaging system on top. (SWIFT is the global organization that each day handles financial transactions such as wire transfers for more than 9,000 banks).

“There is a huge potential for cost savings for banks by making the existing payments networks more efficient,” says Shapiro.

Banks could also become an integral part of the Bitcoin ecosystem, becoming payment processors or running Bitcoin exchanges, says Matonis.

South Africa’s Standard Bank has run a trial using technology from BitX (formerly known as Switchless). And Fidor Bank, a Germany-based digital-only bank that opened in 2006, has launched services that allow its customers to store, buy and sell both Bitcoins and euros.

Digital Currency Is Here To Stay

No mainstream banks have publicly announced that they are embracing Bitcoin but Barry Silbert, one of the most active investors in Bitcoin and a scheduled speaker in the Innotribe track at Sibos, claims a global bank is already trading the cryptocurrency under the radar.

“In my conversations with banks their thinking has evolved and matured since the end of last year,” says Silber. “Most of the major banks have moved from ‘what the heck is bitcoin’ to concluding that digital currency is here to stay.

“So now they have a choice: they can ignore it and get disrupted or embrace the opportunities.”

Many are reviewing the technology. Citi says it is evaluating Bitcoin and the block chain. So is Israel’s Bank Hapoalim. “We are starting to think what exactly we can do with this,” says Gigi Ashkenazi, the Israeli bank’s chief technology officer. “We can’t ignore it, but regulation is very strict. It’s a Catch-22.”

Informilo asked to interview executives from Bank of America, ING and Standard Chartered Bank about their Bitcoin strategy for this story. They all declined.

It will be the “second and third tier banks, the challenger banks that move first,” predicts Bitcoin Foundation Director Matonis.

The Empire Has Yet To Strike Back

Bitcoin expert Andreas Antonopoulos has pointed out in a public podcast that all it takes is one maverick to recognize the inherent value that Bitcoin has as a technology and then all the rest of the banks will have no choice but to participate in the new market.

“The Empire has yet to strike back,” says Bitcoin expert Hileman. “I am not so sure that the banking sector needs to start panicking but they do need to think about what this could mean for the future and get a grasp on where this is going.”

The danger is that banks won’t move fast enough, just as they left easy online payments and the unserved micro-payment space to the likes of PayPal and Square.

“When we go to visit banks and we ask to meet with the innovation team the usual response is ‘I think they have a basement office somewhere’,” says Matonis.

“Banks have 10 times more attorneys than they have product innovators. Compliance steers their product decisions. This makes it difficult for them to steer innovation outside the existing paradigms.”

Image © btckeychain. Released under Attribution-NoDerivs 2.0 Generic.



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