Whilst the “Blockchain is interesting” narrative has merit, it created a dismissive approach to Bitcoin that misses a trick. If you don’t want to miss that trick, read on.
Banks have gotten into this “Blockchain” thing like it’s the new snake oil, a conversation about “Blockchain” will open any door and liberate a little budget. As this Dilbert remix excellently sums up
This isn’t the first post to explore “Bitcoin bad, Blockchain good”, but there are some things I felt still needed to be said. There is an excellent post by Richard Brown (which I recommend reading as pre-text to this) and another by Chris Skinner. Both make the point that saying “Blockchain not Bitcoin” is dangerous.
The subject has become too binary, either you believe Bitcoin will eat the world, or it is incompatible with current banking regulation and practices.
It may be helpful to understand why the banks instinctively warm to the Bitcoin bad narrative. There are three main misconceptions and one thing I agree with fuelling this:
- The Misconception: It’s easier to launder money with Bitcoin
- The Misconception: Bitcoin is not secure
- The Misconception: Bitcoin would not be profitable for banks
- The Interesting Truth: There are valid, exciting and profitable use cases for the technology outside of Bitcoin’s architecture
I’ll tackle the misconceptions later in this post, but first it’s worth a quick refresher on what’s interesting about Bitcoin.
Bitcoin’s Got Talent
Perhaps the reason there are so many misconceptions because so few people understand Bitcoin. It has a number of unique properties that banks are seeing as a threat, rather than an opportunity. Think about the problem of Cash for banks…
Cash Got Problems (yo)
When you have money in your bank account, it’s not actually yours legally. The bank owe’s it to you (as ever there’s an excellent Richard Brown post that goes into more detail on this). They’re using that money on the stock market to make a profit.
The more you use debit and credit cards, the more profitable you are. If you draw out your entire wage as cash every month you’re one of the least profitable customers.
Paper cash is expensive. There are an army of vans moving cash around the country, from supermarkets to vaults and back again. A logistical nightmare that adds a ton of cost compared to digital money.
Paper cash is also risky, it’s near impossible to trace because it exists physically and carries its value as it moves. Do you know where the cash in your wallet came from or who had it last? What about before then? If you ran a drug cartel, it would be very helpful to have a network of chicken shops to take all of that cash and get it into the banking system. In developed markets cash is slowly being displaced (not nearly as fast as you might think!)
But in developing economies it’s a different story
Cash Can Reach Where Banks Can’t
220 Million Agricultural Workers are paid in cash. If you live on a remote farm, or are urban poor, there’s a good chance you’re not profitable as a current account customer. You wouldn’t put enough money in the account per month to make the cost of giving you an account make sense for the bank. Banks have to maintain branches, servers, data centres… all of that cost makes you expensive unless you’re giving them a significant amount of money per month to profit from.
If you get paid in cash, you’re trapped in a cycle of cash.
Recent years have seen the emergence of mobile airtime being used in place of cash… this helps, but only solves part of the problem. You’re still getting paid in cash and you still can’t save or borrow. You’re still not financially included.
Bitcoin As Digital Cash
When I send you money from my bank account to yours, my bank owes me less, your bank owe’s you more. I haven’t paid you, my bank paid your bank.
This isn’t a possibility for under 18s or billions of unprofitable potential customers. This is where Bitcoin has huge potential. As a digital token that holds value, it can transact as cash. When I send you a Bitcoin, you receive it, not your bank.
Can a Bank Make Bitcoins Make Sense?
Regulation aside (for a moment), the mechanics for a bank to accept Bitcoins instead of cash would be relatively trivial. They’d just need an exchange capability. As soon as the “Bitcoin cash” is collected, it wouldn’t have to be physically moved anywhere. If you look at it purely as a cash replacement, it actually makes sense.
Sure Bitcoin is a bearer asset (your bank can’t use it on the stock market – yet), but it reaches where the bank can’t. It’s also got another trick up its sleeve…
Bitcoin is Permissionless
Permissionless innovation was a phrased coined to explain how the internet changed the telecom industry and created opportunity. Before the internet, all of your communications had to be compatible with the telecoms operator you used. The internet created a new set of rules. In a different way, Apple did this with the “App Store”. Inviting the world in to build whatever they like with a set of lego bricks.
Bitcoin similarly is an open set of lego bricks, that will always work no matter who you are. This property does not apply to the bank use
cases of what they call “Blockchain”.
A closed distributed ledger system has many advantages over today’s technology, but it’s not permissionless. It will therefore, never reach the types of customers truly permissionless innovations can.
To use Bitcoin you needn’t go to a branch and provide a birth certificate (which is quite difficult if your nearest branch is 5 hours away and you don’t have a birth certificate!) A mobile network operator tomorrow could decide that their airtime will be tradable for Bitcoins on a Bitcoin exchange.
It would then simply require someone to wrap these two things into a proposition for remittances (like say BitPesa) to make it really easy for Ex-Pats to send money home to their family to be received as airtime.
Bitcoin As a Customer Acquisition Opportunity
Perhaps then Bitcoin is the technology equivalent to the student account. A loss leading outreach programme to win a new generation of customers because they’ll be valuable over their lifetime. This might actually be feasible if local regulation allowed it.
Because the Bitcoin blockchain (ledger) is so very transparent,
you could actually watch Bitcoin wallet behaviour and use that to build risk models.
In other words, you’d be able to identify customers who may be low risk for a savings or loan product.
Granted, there’s a number of sizeable challenges before that could be possible, like consumer acceptance or the regulatory acceptance.
To make any of this a possibility will require a little imagination, a lot of opportunism and overcoming some key misconceptions…
Won’t People Launder Money With Bitcoin?
The recent Silk Road arrests suggest the FBI found it relatively trivial to collect evidence and arrest those involved. The issue is the network itself doesn’t require an identity. In itself, not having an identity to transact digitally is incompatible with existing regulation.
Yet if you see Bitcoin as cash-like, that doesn’t compute. I don’t need to identify myself to hold a small amount of cash. I just need to identify myself to put it in the bank. Which is why we’re seeing regulation focus on wallets and exchanges.
I think this is where regulators need some imagination, or to resist to the urge to look at new technology as if it is something existing
regulation can work with. It’s a hybrid of digital money and cash. So a risk based approach would say the regulation too should be a hybrid.
Regulation focussing more on what CAN be done with the technology, rather than what CANNOT be done will lead to the most innovation.
Is Bitcoin not Secure?
Mt Gox isn’t a Bitcoin problem, it’s a Mt Gox problem. The metaphor would be, if everyone in the room gave their cash to say – Chris Skinner – and Chris left the wallet outside in the street. That isn’t the fault of the bank, it’s the fault of Chris (or in Mt Gox in this case). Actually, Bitcoin has never been hacked. That is a remarkable achievement for a public utility and open source software.
Something that can’t be said for the very expensive Payment Card Industry (PCI) with all its regulation, pain and cost, we still see things like the TARGET hack.
Each day we build a higher wall and each day the attackers get closer. With Bitcoin there are no walls. The funds are so distributed it’s harder to find points to attack
If it’s Cash Surely It’s Not Profitable?
Because it’s digital cash, because it’s permissionless and because it’s transparent I think there are opportunities there. Those opportunities require imagination. They’re not based on the same business model the banks are comfortable with or used to.
If the banks have the imagination to see an internet like world of people who could be potential customers of savings or loan products. Bitcoin could be very profitable as a customer acquisition tool.
The Alternatives to Bitcoin
The points above don’t suggest that what Ripple, Eris or Ethereum are doing is wrong. If anything some of these new entrants may have a better short term impact on traditional finance than Bitcoin does as regulators struggle to get their head around Bitcoin. There are huge potential cost savings and opportunities with distributed ledgers and smart contracts that don’t require Bitcoin.
However, just because a narrative is comfortable and fits your world view doesn’t mean it’s right. If the Telco’s had said “We like the
internet technology, but think it should be closed for just Telcos to use” – people would rightly think it’s crazy talk. Technologies that
treat value as a liability (an IOU), will never be able to displace cash in the same way Bitcoin does.
I don’t see why this argument has to be binary. Either you’re for Bitcoin or against it, it seems. I’m for Bitcoin AND for it’s alternatives. They’re both interesting. Arguably the alternatives more so to traditional banks in the short term.
We’re going to see banks adopt some permissioned distributed ledgers in the coming years and it will be largely invisible to the end customer. Most of the action will be in those large contract movements between banks. Banks will see major benefit from doing so, and doing so aggressively.
During that time we’ll also see non traditional wallet players and remittance companies gradually warm to the open / simplicity of Bitcoin (and / or it’s competitors / upgrades). For this long tail of airtime users and cash users having something that is interoperable and global will be a huge advantage.
The question then is how will PayPal react? Or Alibaba?
The Opportunity Cost for banks of not at least considering Bitcoin could be huge.