Blockchain and cryptocurrency: Their impact on banking

By Juan Rio Salvador

We are all talking about blockchain and bitcoin these days, but why? Mainly because bitcoin was twelve years old this month and institutional investors are FOMO (Fear of Missing Out) into exchanges to buy it. Bitcoin keeps reaching all-time high prices pretty much every week.

Also, financial technology (Fintech) start-ups related to blockchain are popping up like mushrooms and large organizations are setting up internal think-tanks and committees to evaluate the technology.

Adoption of distributed ledger technology and blockchain

There are now many organizations experimenting with blockchain technology and fintech continue to disrupt financial services and money itself.

This combination creates opportunities in all areas of the financial services ecosystem, including regulation, governments, e-commerce, and businesses by reducing costs, improving efficiency, and spreading growth.

Blockchain is an architecture that distributes a common ledger across multiple servers on the internet in a highly secure fashion. It happened to be at the heart of bitcoin and other virtual currencies.

However, it is not the same as bitcoin, even if that is how everything started and it was the only blockchain around. The way blockchain stores data and information is by packaging into blocks. These blocks are linked to form a chain with other blocks of similar information.

It is easier now to find great use cases for blockchain technology including anything that involves a trust factor and contracts between parties. Blockchain eliminates manual processes, paperwork, and bureaucracy and has started to disrupt banking, legal negotiations, real estate transactions, farming, supply chains management, insurance, digital voting, etc.

Crypto Hype in 2017 indicated a potential impact to financial services

I started looking at blockchain and how it could impact the financial service ecosystem around 2017. Bitcoin price reached all-time highs and internet searches spiked.

However, you rarely heard the term blockchain in traditional financial services, it was normally referred to under the wider term of “distributed ledger technology”. This was mainly due to some negative connotations because of its connection to bitcoin and its lack of regulation.

I was at the time working in a vice-president role at one of the largest and most innovative global financial services companies. I liked the fact that no one really owns blockchain technology, similarly to the internet, you can set up specific and private blockchains. However, there was not much appetite to discuss anything related to blockchain and/or cryptocurrencies in the financial services industry yet.

Financial Services was the sector tipped to see both the most disruption and most significant investment in blockchain technology. For example, banks have been using e-money as a means of payment for a long time.

This refers to assets and transactions that are digitalized and transfer electronically normally via SWIFT. Banks are heavily regulated and require licenses and compliance with relevant policies and could benefit massively from blockchain technology.

It is interesting that one of the main drivers of the financial service industry is TRUST and this is a core concept for blockchain. The approach is different but the aim is similar:
• Financial institutions are heavily regulated to guarantee trust and money/assets safekeeping. They are central entities with the authority to manage and store money on central ledgers/databases.
• Blockchain has no central authority but the ledger is encrypted and distributed across hundreds of servers, and the blockchain takes care of making this highly secure. It decentralizes trust and cannot be manipulated.
Banks are traditionally been early adopters of digitalization to verify, settle, verify and record transactions. However, it is only now when they are looking at blockchain to reduce cost and increase speed.

Enter Covid-19 and quantitative easing (QE) …

Business and consumer relationships with cash are more virtualized after Covid-19, and the use of physical cash continues to decline in many markets. At the same time, quantitative easing (central banks printing money and using it to buy securities or to lend directly and/or to pump cash into the economy) has increased the focus on digital and electronic money (e-money). The money transfer and recorded electronically, facilitate electronic transactions. The way I see this is that e-money could now be classified in two ways:

First, the traditional form: centralised and part of the money supply regulated and controlled by central banks and banking authorities. This type of e-money does not change the value of the base currency US dollar, euro, etc. but as traditional fiat currencies (government-issued currency) money it will suffer the impact of quantitative easing (QE). Here the adoption of blockchain could improve the speed and security of electronic transactions.

Second, as part of crypto assets being used for exchange and investment. This is decentralised, not linked to a fiat currency and the supply is determined by bitcoin, Ether, and other virtual currencies and players. This type of e-money is accepted by natural or legal persons as a means of payment and can be transferred, stored, or traded electronically.

The latter, it is not considered a legal tender but as there is no physical form and it uses crypto technology the transactions are much faster and easy than traditional e-money transfer. A potentially negative aspect of quantitative easing is that it can devalue the fiat currency making crypto assets more attractive.

Also, fraud is more difficult due to the logic behind blockchain as the information cannot be deleted or forged. This promotes the store of value function of Bitcoin relative to existing currencies and e-money.

An outlook to the future of crypto investment and regulation

There are more savers willing to take the risk of buying cryptocurrencies directly and leading fintech giants like PayPal, Coinbase and institutional adoption of bitcoin are behind the latest price increases. Payment company Square is buying regularly, MicroStrategy has invested all of the proceeds of its $650 million debt issuance into 29,646 more bitcoin and other institutions are using their corporate cash to buy Bitcoin and lately Ether.

Bitcoin’s perception of a speculative investment is changing more to an alternative currency and medium of exchange. However, the lack of regulation points to a cloud on the horizon for the crypto space. The president of the European Central Bank Christine Lagarde called last week for the global regulation of bitcoin.

She referred to it as “…a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity,” in an interview at the Reuters Next conference. Lagarde also said that “… there has to be regulation. This has to be applied and agreed upon at a global level because if there is an escape, that escape will be used.”

Funnily enough, this was seen as a bullish sign by part of the crypto community, and bitcoin’s price continued at record highs at around the $42,000 peak. The idea is that an appropriate level of regulation will be welcome and benefit bitcoin.

The previous week the top US banking regulator, the Office of the Comptroller of the Currency, approved the use of stable coins for the settlement of financial transactions by banks. The banks can use public chains as infrastructure similar to SWIFT, ACH, and Fedwire. This will potentially transform banking and the global economy. I will discuss this in my next article about Decentralized Finance (DeFi).

Beware of risks and scams relating to bitcoin and other cryptocurrencies

As a risk management expert, I need to cover the risk of the topic involved. Cryptocurrencies have evolved for the last twelve years and with the transformation of the growing blockchain community, there is a move away from the get-rich-schemes of the last few years to a more viable investment alternative.

You can speculate and benefit from cryptocurrency price movements. But it is critical to be aware of the risks of bitcoin and other crypto investing and how to avoid them. Investors need to bear in mind the risk of financial loss, limited use, fraud, and cyber theft.

They should familiarise themselves with how to identify common scams, such as Ponzi schemes, fake ICOs, fraudulent exchanges, and the sale of hardware wallets with a compromised pre-configured by seed phrase that hackers can use to steal funds.

 Author bio 

Juan Rio Salvador is a global business transformation leader and risk management, expert. He has over twenty years of real-world management experience in financial services and innovation in Europe and the USA.

He founded Rioxa Consulting to empower people to thrive in life and in business by inspiring them. Juan is passionate about leadership & business strategy, the future of work, continuous improvements, blockchain, and artificial intelligence (A.I.).

He is an energetic international speaker invited at forums and conferences in Frankfurt, Budapest, London, Madrid, Barcelona, etc. He recently published “How to Build a Thriving Busines, The Proven Formula for Growing Your Business Post Covid-19”.

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