By Dima Okhrimchuk, CEO of Platio
With Bitcoin prices now trading over 70% lower than their January peak, you could be forgiven for thinking that the bubble has burst.
The recent rejection by the SEC of several proposed Bitcoin ETFs has added weight to this view.
It can seem like cryptocurrency is knocking on finance’s door but the financial authorities won’t let it in. And each time, the established financial industry breathes a sigh of relief.
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But rumours of a startlingly different perspective are coming from some of Wall Street’s most venerable financial institutions. Just this month it was reported that Goldman Sachs was considering a plan to offer custodial services to cryptocurrency funds. This week, Bank of America applied for another patent for secure crypto storage, on top of the 50 blockchain patents its already holds.
So what is going on here? And how can you plan for an economic sea-change that few industry insiders are willing to publicly embrace?
As CEO of a fintech active within the space between crypto and traditional banking, I speak with both established financial institutions and the leading crypto innovators around the world. Here are some of the learnings from those many conversations, as well as pointers for planning for a tokenized financial future.
The global players in crypto are far from certain, but soon they will be financial giants
Bitcoin has been counted out so many times since its inception in 2009 that there is even a website dedicated to Bitcoin obituaries. There are 308 of them, at last count. Bitcoin is always on the verge of disappearing. Yet, somehow, it never does.
The website Coinmarketcap currently lists trading information for 1887 different cryptocurrencies and tokens, ranging from the well-known, like Bitcoin and Ethereum, to the unusual, like Dentacoin, a blockchain platform for dentists worldwide.
Yes, it is certain that many of these coins will fail. As with the dot com bubble, many of these projects will never be profitable and will be quickly forgotten. However, Amazon and eBay emerged from the dot com crash to become giant companies. One or two of those 1887 cryptocurrencies are going to be here in 10 years’ time. And they will be financial giants.
It might not be Bitcoin. It might not be Ethereum. It might not be Ripple. We do not know which will succeed, but can be certain that at least one cryptocurrency will.
Because for all its teething problems, cryptocurrency has been shown to work. The current version is rough around the edges, but the concept has been proven. There’s no going back for your institution or your clients.
This all raises the question: what should finance do about it?
Silencing crypto means silencing the needs of your clients
Maintaining silence about crypto or looking the other way is not a viable option. No one really knows how many people are using Bitcoin and other cryptocurrencies, but we do know that thousands of the world’s smartest technologists are working on making crypto payments quicker, cheaper, more secure and more user friendly.
Setting up a bitcoin wallet today needs some confidence with technology. Even so, it’s still a much quicker process than setting up a bank or brokerage account.
As soon as someone has some cryptocurrency they quickly realise that those funds can be transferred around the world, to anyone with an internet connection, in minutes. Geographical boundaries become meaningless. Compare this to bank transfers between EU countries, some of the most integrated countries in the world, which take one to two days. Again, crypto takes minutes.
Once your clients are exposed to the potential of crypto, there’s no going back.
In fact, the point where clients experience frustration is when the cryptocurrency system comes up against traditional finance. If users change their crypto for fiat in an exchange it will take days to transfer their funds to a standard bank account. More savvy technologists, including companies like my own, are working to make this immediate and intuitive. The innovation is coming from outside traditional finance.
And once the options for spending cryptocurrency increase (something else those thousands of technologists are working on), the juxtapositions with the traditional financial world will decrease. A truly independent financial system will emerge.
Traditional finance must listen to the client expectations set by crypto, and crypto companies must listen to the expectations set by traditional finance. Only companies able to blend the two will succeed.
Remittances as an upcoming battleground
The remittances market is a good example of an upcoming battleground.
According to the World Bank half a trillion dollars was sent around the world in 2015 in remittances – the sending of wages earned in one country to family members in another country.
These payments take days and are frequently subject to enormous fees. Transfers between crypto wallets are so much quicker and cost-effective, particularly across borders, that more and more people will explore the alternative. Unless current companies radically improve their services it would not be a surprise to see this market taken over by cryptocurrency payments in the near future.
Traditional finance must embrace crypto… and quickly
There is no other viable option but to embrace crypto, and this is happening behind the scenes in many of our most established institutions. Bank of America reportedly holds more blockchain-related patents than any other company, even beating tech giant IBM.
Even Jamie Dimon, the CEO of JPM Morgan Chase, who last year called Bitcoin a “fraud” softened his position in a June interview to “buyers beware”.
More publicly, The Intercontinental Exchange (ICE) announced its collaboration with Microsoft and Starbucks on Bakkt, a platform which will initially trade Bitcoin. ICE’s futures exchange and clearing house plan to launch a 1-day physically delivered Bitcoin contract along with physical warehousing in November 2018. The companies plan that Bakkt will eventually “enable consumers and institutions to seamlessly buy, sell, store and spend digital assets.”
However, traditional finance may need to move quickly if it is not to lose this opportunity altogether. A recent report by analyst house Sanford C. Bernstein & Co. outlined the huge potential for greater Wall Street involvement in the crypto sphere.
Cryptocurrency exchanges are expected to bring in revenues exceeding $4 billion this year, and are many times more profitable than any other kind of asset exchange. The report says that “as the crypto-asset class seasons and institutional demand builds, there are a plethora of opportunities for traditional firms.” Those firms can offer custodial services, market making, or asset management within the sector.
However, the report also strikes a warning. If traditional financial firms do not move quickly, they risk losing the market entirely. The trading platform Coinbase is estimated to have around half of the transaction revenue pool. If financial firms do not move quickly, Coinbase may soon have an “unassailable competitive position.”
Is crypto ready to take over finance? Not yet. But has it proven itself capable of massively disrupting the industry? Absolutely. Traditional financial firms will have to adapt to this new technology. They must plan to embrace crypto before it’s too late. If not, your bank, broker or investment firm may go the way of your CDs, video rental and bricks-and-mortar bookshop: solid businesses made obsolete by the increasing power of the Internet.