Don't be afraid of the big, bad Bitcoin

Bitcoin and its fellow cryptocurrencies engender their fair share of enthusiasm and scepticism but at a time when the financial services industry is coming to grips with wave after wave of disruption, how long can our banks afford to ignore virtual currencies?

There’s an inbuilt resistance here that to some extent is justified. Bitcoin and its ilk have an image problem, and for banks there’s still far too much volatility and opacity in the cryptocurrency's market to make it worth their while.

While regulators across the globe spin their wheels trying to create a framework that will be make cryptocurrencies more palatable to ordinary consumers, some established players of the Bitcoin universe warn that the wait-and-see attitude of our financial sector could hurt them more than they can imagine.

Forget Bitcoin, think ‘blockchain’

Melbourne-based Bitcoin company CoinJar’s co-founder and chief executive officer Asher Tan says that financial institutions need to start focusing less on Bitcoin as a currency and instead home in on what it offers as a payment network.

“I don’t want banks to invest in Bitcoin, I want them to focus on the use of the Bitcoin protocol for tasks such as payment verification,” he told Business Spectator.

“Right now payment verification relies on networks of trust between multiple third parties. Each entity and network required adds cost and time.  This legacy network wasn’t built for a global, digital economy.”

Bitcoin solves this problem by decentralising the maintenance and automating the trust required. Every transaction made in Bitcoin is recorded by a global network of computers and posted to a public register, ensuring that the same unit of money can’t be used twice. The owners of computers solving and verifying these transactions are rewarded with new bitcoins for their work.

Tan says this validation ledger -- called a ‘blockchain’ -- could be the game changer for banks trying to catch up in the payments market.

As a ledger, blockchain provides a fundamental validation infrastructure which could be used to develop tools that add transparency, improve processing efficiency and, more importantly, reduce fees for buyers and sellers.

Here lies a real avenue of exploration for any bank serious about innovation. For example a bank could use cryptocurrency-based systems to transfer money between subsidiaries. There’s the possibility of trading platforms like the one South Africa’s Standard Bank is working on, and the development of distributed contract services, which can be used to trade property or currency.

The power of blockchain lies in its inherent design, which allows it to solve the problem of trust in a distributed network of machines by validating transfers without the need of intervention form a central authority.

The Internet of Money

Financial institutions, which have a well-established track record of reticence towards disruptive technology, aren’t likely to jump on board with giddy-eyed enthusiasm but they do need to pay attention. Bitcoin isn’t here to replace fiat currencies, it’s here to shake up age-old protocols that banks have enshrined for a long time.

While many banks are quick to showcase their online wares today, it wasn’t that long ago that many were convinced that there was no need to invest in building an online presence.

The advent of the mobile age has now dispelled those notions and while most core services and products have been given a digital makeover, Bitcoin is still a bridge too far for our banks.

The global financial crisis may have been a shock to the system for the financial services industry, pushing it towards greater risk aversion, but in some cases it has also proven to be a catalyst for out-of-the-box thinking.

According to Tan, who is in the process of expanding CoinJar’s operations into Europe, banks and insurance companies in that part of the world are switching gears quickly to prepare themselves for the impending wave of 'Internet of Money' services.

“Unfortunately I am not seeing this level of innovation in the Australian banking industry which is surprising given that we are a nation of early adopters. The real fear is if we don’t dip our toes in the water we may miss the boat,” he says.

A brand new payment engine

That might be a tad alarmist but Tan does have a point when it comes to how quickly services like Ripple, Square and Stripe have carved out a healthy chunk of the payments space.

Meanwhile, Germany’s Fidor Bank AG teamed up with a Bitcoin exchange to offer users the ability to save, trade, borrow and lend financial securities, from dollars to derivatives, without the need of an intermediary. Transactions are handled by users’ computers and verified publicly, making theft or fraud impossible.

Munich-based Fidor is also the first bank to integrate the real-time settlement protocol provided by Ripple Labs. Ripple's open-source, distributed payment protocol enables almost free instant payments in any currency, including dollars, yen, euros, bitcoins and loyalty points.

Banks like Fidor are set to be the first generation of institutions willing to embrace Bitcoin as a stepping stone to true product innovation and the rest of industry is sure to follow.

Making that happen will require the development of proper policies and prudent risk management, and it’s something Tan is acutely aware off.

“We are well past the sentiment stage, you have to cover your bases and meet all the requirements,” he says. “It’s still money and you have to respect that.”

Well yes, it is, but Bitcoin really is a lot more than just a currency. It may never replace the greenback or the renminbi, but it’s already dismantling the old world of how payments and transactions are made.

Asher Tan will be speaking at the Inside Bitcoin event, scheduled for July 9-10 in Melbourne.