In Australia, two of the major banks are looking at opportunities with Ripple, a firm that has adapted the Bitcoin distributed ledger model to make it more suitable for institutional banking.
" The more substantive point is because of the open nature of current distributed ledgers and block chains used, such systems are not even private."
Andrew Cornell, Managing Editor
This interest might suggest the financial mainstream is starting to recognise – or fear – these disruptive systems as a genuine threat which need to be co-opted or at least understood.
Yet look behind some of the more widely reported comments and the prevailing view from the mainstream is much less embracing. “Awake and aware” is one phrase used.
But some financial regulators and operators of major payments systems are much more outspoken in their views.
Erkki Liikanen, the governor of the Bank of Finland, at the European Central Bank/Bank of Finland Retail Payment Conference last week, gave a speech outlining five criteria any payment system must satisfy.
“Their criteria are: 1) technical efficiency, 2) accessibility and non-discrimination, 3) efficient and cost-based pricing, 4) operational stability with contingency plans in case of problems, and 5) international compatibility,” Liikanen said, adding “these criteria should not be considered as something that is imposed upon the payment method providers; they are an essential building block of any sound business case within the field of payment services.”
About Bitcoin he was blunt: “Bitcoin is not subject to the most basic principles governing payment systems, starting from the know-your-customer fundamental principle. Continuity of operations and contingency planning are problematic. And fluctuations in the bitcoin value will impose additional costs to people who use bitcoins.”
Meanwhile, Wim Raymaekers, who manages banking and treasury markets worldwide for the payments giant SWIFT wrote in the Journal of Payments Strategy and Systems if Bitcoin and other cryptocurrencies are to truly disrupt conventional systems “and become a dominant alternative, they must provide distinctive incremental value and overcome a number of critical challenges, such as regulatory uncertainty”.
“That is unlikely to happen in the short term, as illustrated by the relatively low and flat number of Bitcoin transactions.”
This debate is a heated one – just scan the online payments and Bitcoin forums to see – and proponents of the new technology will argue regulators and players like SWIFT are simply seeking to preserve the ancien regime of which they are a part.
But even if their motives are not disinterested, cryptocurrencies face some very considerable challenges – which are becoming more apparent as the scrutiny intensifies.
Some are almost existential. While regulators and governments may lament such new currencies allow unsavoury elements to elude regulation, in fact the more substantive point is because of the open nature of current distributed ledger and block chains implementations such as Bitcoin and Ripple, transaction details are not private.
In order for the vast array of computers in the system – the distributed ledger - to validate transactions, all transactions must effectively be public.
“The block chain, which serves as a public record of all transactions, provides a great tool for regulatory (and competitive) scrutiny,” as Raymaekers says. “If a public key can be linked to a business or individual, it is possible to gain visibility on who is sending what to whom, as well as to examine the block chain retrospectively in order to determine how much money is contained in a given Bitcoin wallet.”
The block chain and ledger system also makes a given transaction more complex to validate. Typically initial verification can take around 10 minutes and have the potential to be reversed. Even final verifications are not totally certain and can take up to an hour.
In an online, instantaneous transaction world, that's too long. And that's with relatively low volumes.
Nor are such transactions cheap when the full costs of verification and running the systems which do the verifying – massive banks of specialised computers – are factored in. Typical estimates put the daily cost or running system at between 1 and 2 per cent of daily transaction value.
Meanwhile, the ranks of computers are increasingly owned by a smaller number of large organisations who, if they come to dominate the market, would be theoretically be capable of gaming transactions.
For a fascinating and slightly unnerving look at one of these operations, check out Life inside a secret Chinse Bitcoin mine (Video). The computer arrays which race to solve the mathematical challenges behind verification are known as “miners” because they are rewarded with new Bitcoins – hence their work is “mining” for Bitcoins.