Of all the new startups during the past decade that are classed as FinTech (Financial Technology) one of the most controversial and potentially powerful is bitcoin. Growth in the use of this cyber currency has been fantastic. Bitcoin transactions per day have grown 150% during 2015. And bitcoins are circulating as never before; with a 10% increase each of the last 12 months.
Of all the new startups during the past decade that are classed as FinTech (Financial Technology) one of the most controversial and potentially powerful is bitcoin. Growth in the use of this cyber currency has been fantastic. Bitcoin transactions per day have grown 150% during 2015. And bitcoins are circulating as never before; with a 10% increase each of the last 12 months. The market value total at the end of 2015 was around $6 billion,with 15 million of them circulating.
As it grows in popularity it also grows in controversy. One reason is the tremendous volatility. Spikes of over 450 percent in the past few years have appreciably tarnished its reputation.
It’s also gotten a bad rap as a haven for criminal financing, such as the infamous online Silk Road black market. This scheme allowed money laundering as well as trade in narcotics. Bitcoins were the medium of exchange. All of this has left an unpleasant taste in the mouth of reputable financial institutions, who are still reluctant to grant it major player status. Still, the underlying system of payment on which bitcoin rests is gaining more acceptance.
It’s called Blockchain. It is basically a decentralized ledger system that cuts out the need for a middleman in financial transactions. In this case, middleman means ‘bank’. No wonder the banking world is so nervous about it.
With Blockchain person number one can pay person number two directly, with bitcoin users (technically known as ‘miners’) keeping independent copies of the transaction. No more bank checks and no more bank transfers. This system can’t be corrupted and is totally transparent, which is what every legitimate transactor is looking for. Another way to put it is that Blockchain makes all centralized financial tracking systems, like banks, redundant.
Obviously if Blockchain catches on, the world of finance is going to be in for an explosive change. And with the transparency and security it offers, it appears that decentralized ledger technology, in one form or another, is the wave of the financial future.
The world banking infrastructure is at a crossroads. It can stay hidebound with past tradition or take a leap into this new and daring technology. The new technology promises greater transparency of regulatory reporting. Criminal financial activity such as fraud as well as money laundering will become much harder to perpetrate, since counterfeiting documentation will be nearly impossible. Identities of transactors stored on the blockchain, for instance, guarantees instantaneous authentication with no need for warehousing data in third party depositories. The presumed competition between distributive ledgers would make for greater efficiency, liquidity, as well as transparency.
The banking industry is responding to Blockchain more positively than to bitcoin, at this time. A banking group formed last year, called R3, is currently working with banks around the United States and abroad to help them understand what a blockchain system can do to promote more commercial applications — they also maintain an ongoing dialogue on establishing consistent industry operating procedures for the new FinTech systems. Banks in the group include Goldman Sachs, Credit Suisse, UBS, and JPMorgan Chase. Managing director of R3, Richard Gendal Brown, has emphasized the cryptographic security capacity of Blockchain. He thinks it will provide an authoritative system of recording that will be able to be shared with complete security between financial firms.
Several banks have been doing their own studies of the blockchain platform. USB actually created what they call ‘innovation labs’ to find out how well blockchain could shrink systemic costs and give quicker and more secure transfers — especially outside of the United States. They are working with blockchain startup Clearmatics on using cryptocurrency linkage to real world monetary currencies connected to central banking accounts. BNY Mellon is also currently looking into partnering with a blockchain startup for an in-house rewards system using cyber currency, although they have not yet released any names or dates.
Citibank also is beginning to invest in blockchain technology applications. They are coming out with a Citicoin product that is an obvious knockoff, albeit without the rap sheet, of bitcoin. They are also looking into the viability of foreign state-backed cyber currencies. The potential savings in cross-border transactions, compliance, and securities trading is estimated at nearly $20 billion. Some banking boards are even inviting FinTech startups to join their directors. Another way of putting this is that banks themselves, although torn between the desire to save money and the fear that blockchain technology is just another pie in the sky bubble, are actively financing much of the disruptive FinTech schemes themselves.
Despite high hopes, the real technology for Blockchain is still preliminary. Research manager Tim Swanson at R3 states categorically: “It’s just learning how to walk, so to speak.”
Swanson thinks that blockchain technology must be up and running for waiting financial institutions within another year or it will not gain enough momentum to succeed.
In the meantime, the Euro Banking Association says that innovative blockchain programs will come in two distinctive waves. First will come new thresholds in transparency, security and efficiency at a significant drop in cost. That should happen within two or three years. Next cryptotechnologies that are currently just a designer’s dream will become reality and allow banks to use blockchain technology without relying on the disreputable bitcoin.