This is my mea culpa, my confession: During my time working at some of the largest, most powerful financial institutions in the world, we openly mocked cryptocurrencies—specifically bitcoin.
To put it bluntly, we were wrong.
From our ivory towers, we were all too familiar with the “barbarians at the gate” headlines. After all, many have tried (and failed) to disrupt the financial space, mostly by underestimating the barriers to entry. Visa alone has more than 16,000 banks and 3.2 billion cards, not to mention access to heavily regulated financial systems. It’s no wonder bitcoin was dismissed as yet another alternative payment method destined to flop.
Bitcoin initially lacked the acceptance and throughput of a successful payment network competitor. Furthermore, currency requires predictable value, wide acceptance and lots of liquidity. For money to be useful, it must be worth as much tomorrow as today, and be both accepted and accessible. Bitcoin is still failing by some of these measures. But the cryptocurrency community deserves plenty of credit, considering it’s on the verge of mainstream brand recognition.
Tales from the cryptic currency
When laypeople hear the word “currency,” they typically think about paper they exchange for food at the grocery store. In reality, we know the majority of money spent is not retail; international trade, business payments and investments dwarf retail payment volume. In fact, checks, automated clearing house (ACH) and wire still make up the majority of payment volume in the U.S. In 2017, more than $740 trillion was transferred in the U.S. via Fedwire, while Visa’s worldwide payment volume the same year was less than 1 percent of that figure.
All of this is to say that the term “currency” is a bit of a misnomer. Consumers aren’t likely to buy bananas with bitcoin anytime soon (even if some are bananas over bitcoin). But the industry largely failed to consider how the broader financial system could use the related technology of blockchain to power improvements.
Instead, as banks stood their ground anticipating the slow death of bitcoin, something unusual happened: The bitcoin community successfully cut out the bank for perhaps the first time in fintech history. In an attempt to appear innovative, banks began to make their own blockchain platforms and today, these centralized, closed blockchain solutions compete with decentralized, open-source solutions.
Blockchain carries power because it has the capacity to democratize capital, but financial institutions shouldn’t fear it. Instead, they should look to blockchain and emerging digital currencies as a way to position themselves for the financial future. Here’s how:
1) Welcome the benefits.
By and large, financial institutions need not worry about disruption. Most benefits provided by the industry such as trust, compliance, security and advice, aren’t at risk — just the way they’re offered is. According to a report by Santander InnoVentures, digital currencies created by banks could eventually save the industry about $20 billion each year. From that perspective, financial services companies should openly embrace the benefits of the new technology.
2) Utilize public solutions.
At the moment, public solutions are not only the most cost-effective option but also have the most robust support from the community. Financial institutions collaborate on blockchain solutions in more than 40 industry consortiums, and that is a great first step. The Global Payments Steering Group—whose members include Bank of America, Mitsubishi Financial Group, the Royal Bank of Canada and others—is just one example.
Banks can’t go it alone, however. They must accept and engage with the open-source communities’ contributions to this space—or risk getting left behind.
When was the last time the banking industry dictated the adoption of a specific programming language, rather than allowing its engineers to work with whatever language they preferred? In the same way, rather than develop their own ecosystems, banks would do well to work with open-source technologies, such as ethereum and NEO, to create interoperable platforms—or at the very least, hybrid networks that can communicate with one another.
3) Provide compliant options.
At a time when security concerns stand at the forefront of every financial institution executive’s mind, it’s crucial to provide secure, compliant options for clients. Furthermore, working with the industry to empower connections to the digital-asset industry will benefit both banks and their customers. By providing the trust and compliance of a traditional bank into the ecosystem, banks can allow the software platforms to continue to innovate while remaining relevant and engaged.
Not long ago, financial institutions viewed bitcoin with contempt. But after more widespread adoption, unease has settled in. Fortunately, financial institutions have far more to gain from blockchain technology than they have to lose.
By embracing digital currencies early on, they can position themselves to enjoy competitive advantages associated with the technology and, more importantly, provide their clients with a superior experience. If you will: It’s time to let the mocking give way to taking stock.
Bob Rutherford is the CEO and founder of HEDG, a complete software platform that allows traditional financial companies to offer digital currencies to their customers within the current regulatory framework. Bob has spent the past seven years in fintech at JPMorgan Chase & Co., Visa, Dwolla and Carneros Bay Capital.
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