06 Feb 2017
" [Bitcoin] has also been dismissed and written off so many times there is an ironic collection dedicated to the subject."
Max Tannahill, Business Change and Implementation Manager, ANZ
Predictions on Bitcoin's future have been as varied and optimistic as a reserve currency to rival the US Dollar, a threat to the Debit and Credit Card business models, a disruptor of remittance corridors (despite the challenges of the “last mile”) as well as the notarisation and document registration industries.
Yet the currency has also been dismissed and written off so many times there is an ironic collection dedicated to the subject and, lately, particularly amongst the financial industry as merely an interesting app on the far more interesting piece of technology: the “blockchain”.
Of all the conclusions to draw about Bitcoin, the last one is the most dangerous for banks. Whilst the debate over the merits of a ledger (open to anyone to contribute to as opposed to only trusted participants) is fascinating, even if banks are successful in developing some type of utility settlement coin as a way of improving reconciliation between counterparties they must also integrate with Bitcoin or risk only focussing on building another SWIFT or DTCC-like network.
Bankers can dismiss Bitcoin as just the opening act for the blockchain (which itself has been described as just a fancy kind of database) but this trivialises what the protocol has demonstrated: secure and irrevocable wealth transfer in an environment without institutions. This has been achieved by rewarding participants with an token utilising a chain of hash-based proof of work.
This is unprecedented. Additionally, Bitcoin remains the world's most robust (the increased immutability makes it more resistant to attack) and ubiquitous distributed ledger. As a permissionless peer-to-peer network, even if it doesn't become the de facto form of payment in the future it will remain a vital means of transacting due to its unique offering.
Most retail banks could do better when it comes to offering their customers cost effective ways of handling micropayments, monetising content or donating. Poor foreign-exchange spreads, long accepted grudgingly by customers are already being disrupted but Bitcoin can be used as the intermediate currency where these services have not yet launched.
In addition to these more conventional use cases are the potential of programmable transactions, where, for example, a payment could unlock a door to a hotel room. Bitcoin may offer the realisation of the internet-specific method of payments envisaged in the original application protocol (the 402 code) for the World Wide Web, a need that will only increase as the world becomes increasingly connected.
There is no way correspondent banking can handle this for users in a manner comparably efficient or secure.
More tellingly, Bitcoin 'wallets' (better conceptualised as keychains offering users control over their digital tokens) have more sophisticated than original designed.
Banks now offer digital representations of operational structures which have existed for years: merely a record of abstract balances and transactions, rendered in a single fiat currency which requires the customer to make manual sweeps from current to savings to stock accounts. Third-party hosted wallets are providing users the ability to receive, spend and hold money in a combination of currencies or even, be their own bank.
Even the trust created by government-guaranteed deposits could be eroded. After all, who needs a lender of last resort when you can publicly and transparently prove you are solvent? Will taxpayers continue to accept a large transfer of wealth to the financial sector which does not adequately compensate them for the risk undertaken?
What has been the response to this threat so far? For the average retail customer, the mobile revolution has simply ushered in the ability to manage their account on a palm sized device. The security process in banking apps are often onerous for the average user.
Two-factor authentication utilises SMS at best or, typically, separate physical secure tokens as opposed to the authentication methods used by Bitcoin exchanges and cloud services which work seamlessly with a range of tablets and phones.
Mobile peer-to-peer payment functionality is stubbornly kept walled off and arguably offers less functionality than electronic bank transfers initiated on a browser. A user of Dash or PayLah in Singapore is only able to pay other individuals by their phone number where they also have an account at Standard Chartered and DBS respectively.
The Faster Payments, FAST and SEPA networks are not free to operate and they will need to open up to newer players.
Integrating consumer accounts with the ability to send and receive Bitcoin would immediately deliver benefits to users they will only seek out themselves when the technology becomes more widespread.
Moreover, retail banks are fortunate they are already sitting on what the tech sector values so much: a user base. With their experience in trading technology as well as in AML, KYC and CFT checks, financial institutions are far better positioned to become the trusted intermediaries for exchanging digital assets to Government issued currency than the new upstarts.
Bitcoin was described by Satoshi Nakamoto as 'digital cash' and, for this purpose, banks would be wise to treat cryptocurrency in exactly the same way as physical cash deposits and receipts.
Adopting Bitcoin would also counter the threat of Apple Pay, Android Pay and payments in Facebook Messenger. As an open protocol, Bitcoin would offer users far more flexibility in how they would transact than the closed ecosystems these services will inevitably bring.
To avoid their Kodak moment, retail banks should take up their natural role of a 'trusted gateway' before it is too late.
Max Tannahill is a change manager and business analyst at ANZ.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
06 Feb 2017
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