Decade of the blockchain banks?
What is happening in crypto that any bank needs to care about
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” Satoshi Nakamoto
This first line of the abstract of Satoshi Nakamoto’s 2008 Bitcoin white paper, marked the very beginning of bitcoin and the blockchain technology that has been with us for more than a decade now.
2017 was the year of the ICO, 2018 was the year of the “stable”coin, but 2019 seems to be shaping up to be something else. Unlike what that very first line of the abstract in Satoshi Nakamoto’s bitcoin white paper suggests, bitcoin is no longer a fledgling anti-establishment currency — it’s something else altogether. Something that has the potential to bridge financial trade around the world. The question for bitcoin is no longer “why associate with banks at all?” but more, “why not institutionalize and spread crypto adoption even further?”
So, what’s actually going on with the banks and what are their response towards the growing crypto- and blockchain industry?
In February 2019 J.P. Morgan Chase (JPM) released the first American bank-backed cryptocurrency, but it is very different from Bitcoin, Ethereum and the coins that usually would be considered cryptocurrency. JPM themselves say they are:
“supportive of crypto-currencies as long as they are properly controlled and regulated” Umar Farooq, Head of Digital Treasury Services and Blockchain
The JPM Coin is intended for internal settlements between institutional accounts. So, is JPM Coin really a crypto, is it even built on a blockchain or on another kind of distributed ledger technology?
What is the definition of a cryptocurrency in 2019? Do the likes of JPM Coin and Ripple fall into that definition? Or do we need to rethink the definition itself? These questions have been posed by Michael K. Spencer by Matthew Beedham, David Gerard and by NewsBTC’s Cole Petersen. I will get further into this, but first let’s look at this technological development in JPM’s own words.
Most people who have been following bitcoin for a while know that JPM’s CEO, Jamie Dimon, isn’t bitcoin’s biggest fan. In the past he has made numerous comments about bitcoin being “a fraud”. However, his comments have later been altered and admittedly regretted. The 2018 JPM research paper Decrypting Cryptocurrencies: Technology, Applications and Challenges explains very well why that is the case.
Regardless of the commentary, JPM has been investing heavily in blockchain technology. The conclusion from them is that blockchain has huge potential and that banks should invest in start-ups and pilot projects to stay on top of blockchain innovation. With a number of investments in blockchain, it’s surprising that JPM has turned a blind eye towards “traditional” cryptocurrency, an industry burgeoning with growth and untapped markets.
“JPMorgan Chase announced Monday the launch of a blockchain-based system that will “significantly reduce” the number of parties needed to verify global payments, thereby cutting transaction times “from weeks to hours.” Evelyn Cheng (CNBC)
Looking at this, combined with how CNBC describes the JPM initiatives, it becomes evident that JPM and banks in general are trying to do what bitcoin claimed it would: make transactions faster and cheaper, cut out middlemen, and facilitate truly global payments for everyone, just to name a few.
Wells Fargo have recently announced a collaboration with FinTech company TransferMate. Following the trend of Fidelity, Morgan Chase and SBI. The goal is to create cost-effective solutions for global payments, increase transparency, speed, eliminate high fees and to overall improve the payment infrastructures. This is all done in order to combat the cryptocurrencies and blockchain-based solutions that are shaking up the financial services industry.
Christine Lagarde, managing director of the International Monetary Fund, says that:
“distributed ledger technology, whether you call it crypto assets, currencies, or whatever — (…) it’s far from the bitcoins that we used to talk about a year ago — that is clearly shaking the system. We don’t want innovation that would shake the system so much that we would lose the stability that is needed.”
This leaves us with some key questions that we need to ask. How are banks going to impact the crypto industry? What plans do JPM and other banks have? And how will cryptocurrency develop with the arrival of the banks and financial services in the space?
Some people, such as Peter McCormack, predict that the banks will end up acquiring large exchanges, such as Coinbase and the likes thereof for hefty sums.
“I do believe a large bank will buy [Coinbase] one day. Probably for gazillions.” Peter McCormack
This alludes to a scenario where the banks will not be able to gain significant market shares by creating their own cryptocurrencies and payment solutions, and that they will need to cooperate with or acquire established crypto exchanges.
Peter McCormack has a point. The main thing that has kept banks away from cryptocurrency is decentralization and problems associated with KYC, terrorist funding, and AML compliance. But as governments worldwide pass regulation and blockchain analysis becomes a business standard, cryptocurrency will become increasingly appealing for highly regulated entities.
From a mainstream media consumer perspective, bitcoin and cryptocurrencies used only to be associated to libertarian idealogues, the Silk Road and other dark marketplaces.
The going perception was that cryptocurrency was inherently linked to illicit dark web trading. Early crypto adopters made the case that US Dollars promoted the enablement of illicit trade just as much, if not more than bitcoin ever had. We don’t know how much of US Dollar trades are illicit, and that data is admittedly hard to get.
Elliptic blockchain-analysis research has however provided us with some data that can clarify the disagreement. 2018 data-analysis revealed that less than 1% of the transactions on the bitcoin blockchain were illicit. The research proves that crypto has come a long way in meeting the critique made by Jamie Dimon, Mark Carney (Bank of England governor) and many others.
Altogether this spells good news for the banks. Although banks have the resources to enter the space, regulation is still complex and varies from country to country and state to state. Regulation and AML policies are however increasingly becoming standardized and banks may be able to find a silver-lining between decentralization and the untapped market possibilities it contains as well as maintaining and building control over their assets and self-developed blockchains.
Surveys indicate that public trust in the banks is still relatively low after the 2007–2008 financial crisis, but this has not made the business case for the banks any weaker.
In the coming years we will see crypto exchanges and banks competing for the same customers, and the banks have some catching up to do if they want to compete with the likes of Binance, Circle and Coinbase.
We might end up seeing the same scenario we did with Google acquiring Youtube and Facebook acquiring Instagram, where acquisition becomes easier than competition. Something I think Peter McCormack also would agree with.
The crypto-exchanges might have a technological lead, but the banks should be considered a serious marketshare contender, due to their capital, consolidated place in the current financial system, and ultimate backing by nation states.
My prediction is that the coming years will be shaped by the banks trying to provide customers with the advantages of crypto along with the familiarity and trust of a classic banking service. Bitcoin- and crypto-ideology will be challenged by banks’ semi-centralized blockchains and as Andy O'Sullivan argues banks should and will try to:
“heavily diversify, to align and collaborate with other companies and try to become more than just a company that their customers are just used to using, as opposed to wanting to use” Andy O'Sullivan
Crypto is going to be a changing and exciting industry in the coming years, or to put to it in the slightly more formal words of the Corporate & Investment Banking department at J.P. Morgan and Oliver Wyman:
“a broad consensus is emerging that it [blockchain] represents a real innovation over many of the systems and processes used in financial services and banking today.” (JPM & Oliver Wyman)
“We see four successive waves of deployment for blockchain technology. Initially, we expect the first two waves to be focused on sharing and using data, before expanding to critical infrastructure once confidence in distributed ledger technology grows. The final wave, in which a truly decentralized financial ecosystem arises (…)” (JPM & Oliver Wyman)
And finally…
“recognizing the impact that FinTech innovation continues to have on the industry, it is pragmatic to be well-informed and organized to unlock economic advantage in an increasingly digital world.” (JPM & Oliver Wyman)
To sum up:
Now is the time for banks to enter the blockchain and crypto industry.
The market is ready, but it is not waiting.
