The Bitcoin & Blockchain Divorce by Banks

Not A Day Goes By Without The News Mentioning Bitcoin & Blockchain

Back in the 1980’s, people could go to their local grocery store and buy products even if they didn’t have any money. The shopkeeper, with a physical notebook ledger noted down how much money you owed to him and by when you were due to pay him. Think of this concept but the ledger is online and each page is a blog that can never be changed. This is blockchain technology.

Similar to how the internet changed the world by providing greater access to information, blockchain is poised to change how people do business by offering trust. By design, anything recorded on a blockchain cannot be altered, and there are records of where each asset has been. So, while participants in a business network might not be able to trust each other, they can trust the blockchain.

Not a day goes by without a fresh announcement on how banks and financial institutions are using blockchain technology to aid efficiencies and transform their processes. Blockchain firms raised more than $240m of venture capital money in the first half of 2017. Much of it from banks, including $107m raised by R3.

Bitcoin Claims To Be Proven But Banks Are Still Skeptical

It is difficult to speak about the positivity of blockchain without mentioning bitcoin. Bitcoin transactions are stored and transferred using a distributed ledger on a peer-to-peer network. This network is open, public and anonymous. Blockchain is the underpinning technology that maintains the Bitcoin transaction ledger.

Our company, Finocracy, recently attended a Blockchain & Bitcoin seminar at Capital Club in Bahrain. Blockchain was met with unprescedented support whilst bitcoin faced sharp skepticism from the audience.

There are two key reasons why bankers and industry experts rejected bitcoin:

1. The Bitcoin Brand Is Tainted: Bitcoin is often associated with cyber-crime and illegal substance dealers. By allowing the anonymous collection of ransom without intermediary banks or governments, Bitcoin is probably the single biggest enabler of ransomware. Much has not been done to reshape the brand  perception of Bitcoin in order to provide trust, reliability and credibility in the minds of GCC bankers.

2. Bitcoin Is Too Volatile: There’s volatility. And then there’s bitcoin volatility. Bitcoin is now trading at $7,300 at the time of writing. During the time taken to write this post it had shot up by almost $1,500 in just a week. However, it has seen significant negative jumps in price over it’s history. For e.g. the value dropped $1,000 dramatically on the announcement of China banning ICO’s.

Can We Use Blockchain Without Diving Into Bitcoin?

The short answer is yes. MasterCard announced last month it is offering the ability to send money over a blockchain rather than by swiping a credit card. The move is to open up its blockchain to certain banks and merchants as an alternative. This provides an efficient method of paying for goods and services.

There is one fundamental difference between Mastercard’s blockchain and other tech giants such as IBM. The blockchain developed is cryptocurrency agnostic. The IBM blockchain transmits money in the form of Lumens, a virtual currency. Mastercard’s blockchain operates independently of a cryptocurrency, instead it accepts payments in traditional local money.

“We are not using a cryptocurrency, and we are not introducing a new cryptocurrency, because that introduces other challenges—regulatory, legal challenges,” Justin Pinkham, Senior VP Mastercard Lab. (Fortune, 2017)

This model stands in difference to current blockchain systems, where the ledger of transactions are tied to a specific cryptocurrency.

So What Other Ways Are Banks Practically Using Blockchain Without Bitcoin

Bank Transfers – The era of near instant bank transfers is nearly here. Ripple, a digital currency and blockchain open payment network allows for bank transfers to be complete in 2 to 7 seconds. Earlier this year, Thailand’s Siam Commercial Bank in collaboration with Japan’s SBI launched an instant remittance service. This remittance corridor sees approximately $250 million transferred each year.

Identity – KYC and verification of counterparties is vital for banking. The average bank spends £40m a year on KYC according to a recent Thomson Reuters survey. JP Morgan CEO Jamie Dimon wrote in a letter to shareholders that the firm had spent £1.6bn on their Compliance Department, employing 13,000 people to ensure they were addressing regulatory issues. For years banks have been trying to set-up a shared digital utility to records customers identities and keep them updated. However, they have failed to find the right solution. Through a blockchain system incorporating identity checks, banks could save millions in operating costs and penalties.

Clearing & Settlement – Accenture estimated that investment banks could save $10bn by using blockchain technology to improve the efficiency of clearing and settlement. The current clearing industry is dominated by centralising institutions such as central banks. Yet blockchains are meant to be decentralised. ‘Clearing Institutions’ are working with banks and start-ups to consider shared ledgers to reduce their operational costs. Critics identify that legal and structural challenges need to be overcome in parallel to technology advancement in order for it to work.

But Bitcoin Was Needed To Inspire A Generation

The success of bitcoin and it’s underlying technology inspired other coins to be created that provide a more realistic benefit for banks and financial institutions.  The value of the most popular offshoot, a cryptocurrency called Ethereum. Whereas bitcoin’s blockchain is used as consumer payment technology, ethereum’s blockchain can also be used for its ‘smart contract’ applications – which is what attracted the interest of MNC’s such as Accenture, Microsoft and UBS.

“The sky is the limit in what I can express” with a smart contract, said Grainne McNamara, who runs financial blockchain programs for PwC, at an SEC conference in November. “I can write a check that says, ‘Look, I’d like to fund your Kickstarter, I’d like to give you $5,000, but only if you have raised the $5 million that it’s going to take you to shoot your new indie film. Otherwise, the money reverts back to me.’”

In a recent survey of 1,100 virtual currency users, 94 percent were positive about the state of Ethereum, while only 49 percent were positive about Bitcoin, the industry publication CoinDesk said this month.

Perception is always key.

What’s Next, Apple Coin?

Whilst banks and regulatory bodies are implementing digital strategies for cryptocurrency adoption by citizen’s and ecosytem players, key experts believe that it will be key industries themselves that define which cryptocurrencies wil be used using Blockchain.

In our closing session at the Bitcoin & Blockchain seminar at the Capital Club in Bahrain we were left with a thought to ponder on.

If Apple were to launch an ‘Apple Coin’ and now made it mandatory that you can only buy Apple products using the ‘Apple Coin’ would that deter you from buying another Apple product or not?

And the thought continues …. unless you are an Android fan.


FinTech’s Are The New Rule Makers

Finocracy’s Head of Strategic Alliances, Tayyaba Ahsan, recently had a chance to attend a short yet crisp session arranged by HSBC UK, meant to cover the hot topic; “Banks and FinTechs, collaborating for a better future”.

This session was particularly of interest as Finocracy positions itself as an implementation partner bringing together banks and global FinTech players in collaboration to accelerate the digital agenda in GCC. Here is her personal insights blog below.

Very Few Know Why Collaboration Is Critical

In a hall full of some 80+ professionals, one wondered how this session will add value to what is already known – yes collaboration is the way forward, for banks boost years of heritage, legacy systems and customer base, while FinTech startups have the innovation/technology to keep these banks relevant for the millennials.

But beyond these clichéd words, very few people know the practical implication of why collaboration is critical at this stage, and what way forward are we referring to in every opening remark that introduces the concept of FinTech. Are these startups a piece of the missing puzzle? Is it an extra engine to boost performance and revenue?

Seldom have I seen an in-depth discussion that talks about the real challenges faced by banks resulting from significant shift in customer’s preferences, the pressing need to ‘collaborate’ with FinTech startups and finally, finding the most relevant strategic fit to embark the digital journey.

The session started off with some interesting insights shared by Raman Bhatia, Head of Digital, UK and Europe, HSBC. It came as no surprise that a place like UK, more than 90% of HSBC’s banking interactions are done digitally, and interestingly enough, the last 5 years have witnessed reduction of their branch footfall by 40%.

Globally, it is predicted that in a couple of years about a quarter of the world’s population will be mobile banking users, a number close to whopping two billion users, and that is happening in a very pronounced fashion in places where the use of technology is not yet prevalent. For example in Asia, the leapfrogging has already begun and we have seen the emergence of some very prominent and impactful financial eco-systems. So yes, the need for banks to embark on their digital journey and to ‘get it right’ is very real and very urgent. So what does this mean for the financial institutions?

FinTech’s Are The New Rule Makers

The rules of the game is now being set by the FinTech scene, and this digital era is more of a challenge than opportunity for large legacy banks. Suddenly, and not so, there is an urgent need for banks to invest heavily in improving their innovation cycle and match the speed of change and the very intuitive nature of change that startups are offering to customer now. HSBC has not shied away from openly declaring immediate areas that needs attention:

  • First and foremost, there is a pressing need to invest in technology platform that will address all the legacy challenges that can be expected out of a large enterprise like HSBC.
  • Secondly, if the digital era is a result of change in customer preferences, then there is an urgent need to transform the way bank interacts with customers. The real promise of digital is in many ways a return to the healthier days of banking where we walk into the bank and the teller behind the desk knows all about you, your family, your goals and if you could do that with scale now, digitally. Hence the challenge lies in the ability to digitally personalize banking, with heavy investment in data and analytics.
  • The third area of investment, and most important one yet, is changing or defining the banking of the future through collaboration and partnerships. In the next few years if you have to survive and thrive as a universal bank, you need to go from product manufacturing mind-set to an eco-system walking station one, where you are collaborating with select FinTech players, who share the same vision as you. In addition to having select partnerships around learning and testing, banks need to have a separate budget to invest in FinTech players to help launch platforms in areas such as big data, cyber security, open banking and automation.

HSBC’s New Strategic Partnership With Bud

At this stage, HSBC went on to announce its strategic partnership with Bud, who is building an app for HSBC’s subsidiary First Direct that will trawl databases for the best broadband and energy deals, personalized for each customer. To quote Bud’s CEO “We’re trying to change the banking app from the place where you do your banking to the place where you get things done in your life,” Rather than just going to the bank when you need a mortgage, Bud could help banks build an app that lets customers search for houses, sell their own property, and get a mortgage all in one space, for example.

At the end of the session, there was one thought-provoking query from the audience. What enables large banks like HSBC to partner and take small startups like Bud seriously?  In addition to this, what intrigued me the most was how did two under-30 co-founders, of a 2-year old startup called Bud, convince one of the largest banks in the world to collaborate with them? Upon doing a quick search, I not only found out that it has raised GBP 1.5 million from backers including investment bank Investec and Spain’s Sabadell Bank, as reported by Business Insider UK, but is currently in talks with 42 other banks around the world for possible partnerships. So what makes them so successful? To quote Bud’s cofounder and chief technical officer George Dunning:

“We have a completely full understanding of the end-to-end journey of every user, we can control that journey and we can tailor it however we see fit. When we were talking to the banks and they had a challenging technical question, we were prepared. If you get into those conversations and there’s ever a question that you can’t fully answer, then you’ve lost.”

I guess I got my answer.