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Bitcoins and blockchains: should the banks be worried?

Future banking

Bitcoin is going nowhere fast apparently, at least according to a recent Swift Institute report.

“Since the size of Bitcoin investments and transactions can be characterised as small relative to other assets,” says the report, “we do not see an immediate risk or even threat for financial or monetary stability.”

That’s good news then. Doesn’t it feel as though Bitcoin could be a disruption too far? The idea of an online currency is a bit futuristic. While the cryptocurrency generally receives high praise, it has its critics too. William Shatner (aka Star Trek’s original Captain Kirk) said on Twitter in 2014 that he thought that bitcoin was a “cyber snob currency.” He may have had a point. But before we set our phasers to ‘stun’, it’s worth considering that Microsoft founder Bill Gates, Virgin founder Richard Branson and a number of other government and technology leaders are big fans.

“I think bitcoin is a techno tour de force,” said Gates in a Fox News talk in 2013.

“Bitcoin is going to be a big player in the future of the exchange of goods and services,” said Jennifer Shasky Calvery, the director of the US Treasury Department's Financial Crimes Enforcement Network in 2013.

Future disruption

All great stuff, but what impact will Bitcoin have on the banking industry? The Swift Institute concludes in its report that, while the currency is still in its infancy and not ubiquitous enough to be a threat to existing monetary models, there is scope for disruption in the future.

“If the acceptance of Bitcoin or similar virtual currencies increased significantly on a global level, it could affect the behaviour of consumers and producers and as a consequence change the relevance of monetary policy,” says the report, adding that “given Bitcoin’s global decentralized nature and independence from any central bank or supranational authority, regulatory oversight may be difficult and challenging.”

It is certainly an intriguing proposition. But what is becoming increasingly apparent is not so much the value of the currency, but the value of the underlying technology - the blockchain.

“In today’s banking world, it is all about cost savings, as they are all struggling with low returns and that is why they are all locking on to the blockchain,” says Richard Lumb, head of financial services at Accenture.

Greater engagement

Lumb was launching Accenture’s prototype of an editable blockchain for the enterprise that claims to give banks and financial institutions a way to engage with the platform and make regulatory edits where necessary without breaking the transaction chain.

Accenture claims that an editable blockchain will make the technology “more practical and useful for enterprise systems and accelerate its adoption,” adding that “it combines the confidence that comes from immutability with the pragmatism required in an imperfect world.”

For many it may seem like a leap too far, a ‘beam me up, Scotty’ idea best left to a few brave institutions to test the waters and then wait until the dust settles. The clear take away though is that blockchain in particular has a future, if only because it can trace every transaction with every individual coin.

What is happening here is disruption but at a more cautious, manageable pace. Small steps make sense and increasing visibility of transactions for customers is surely a positive move forward. It’s a cultural thing that will not only improve services but will increase trust and reduce risk. These are necessary steps if only to prepare the cultural and regulatory ground for what is to come.