“Our innovation lab at Level39 will provide a unique platform to explore emerging technologies such as blockchain and cryptocurrencies, and to understand the potential impact for the industry.”
The article and its derivatives piqued my interest at several levels.
First, I know Bussmann. He's wicked smart and an assiduous user of social media. He did an outstanding job at modernizing chunks of SAP and introducing thousands of iPads into what was a wall-to-wall IBM/Lenovo environment. Anyone who can pull that off in a company like SAP gets a big thumbs up from me. So when he talks in these terms, I want to understand what he's saying.
Second, I've been quietly following the Bitcoin story for a while. It's not easy to understand, even for someone like me who has had international finance related roles. I don't think the story is made easy by the arcane use of unfamiliar terms or the naming convention of 'crypto-currency.' Sounds like something alien - right? Far better to simply term Bitcoin as a digital currency.
Third, while much of the focus has been on headline grabbing stories like the illegal drug selling site Silk Road, the Mt Gox collapse, early regulatory failure and the like, investment has been pouring into technologies surrounding Bitcoin and the blockchain in particular.
When the pieces fall into place then you quickly see that the blockchain could upend the financial systems of the world as we know them. But hang on - what's this blockchain thing?
What's the blockchain?Last year, our own Phil Wainewright took a tilt at this, I'm taking this half a step further.
Blockchain is another of those weird terms that sounds like a method of shackling prisoners when in fact it is the opposite. It's a geeked out composite word meant to be descriptive of how the blockchain works. Right now, the technicalities don't matter, it is what it can do that matters.
At its simplest, the blockchain is the fully decentralized global ledger used to record all bitcoin (or digital currency) transactions. In book-keeping terms it is a vast open ledger that anyone with the right technology can mine. In technical terms, the blockchain represents the infrastructure upon which Bitcoin exists and through which Bitcoin is mined for profit.
This has a LOT of advantages over existing financial infrastructures.
I do think that bitcoin, or one of its off-shoots, will eventually become the global standard for online transactions. And I think it will have a role to play in bringing unbanked people in developing markets into global commerce.
The problem is that we've heard all this before. Digital currencies are nothing new. Anyone remember e-gold? Like some of the early forays into Bitcoin's surrounding markets, it fell to hackers, fraud and...regulation, a triumvirate that sounds very familiar today. You can argue that e-gold was the forerunner of PayPal which has its own turbulent history but which has since spawned a slew of innovative ventures.
UBS venture into this arena is interesting. They are the latest of a string of banks to take a shot at incubating for the blockchain. This matters a great deal because one thing the blockchain can do which banks are notoriously slow at is - you got it - transaction processing. Done right, the blockchain acts instantly. Gone would be the days of waiting while money sloshes around the financial system.
The potential impact is huge, hence bank interest (sic). Think of it this way. Each day there are trillions of dollars, yen, British pounds, you name it, swilling around the global banking system. Someone's lending that money and someone's borrowing it because even if it is not credited as cleared to your account, the holding bank can still make money from it on overnight deposits.
In monetary terms and assuming a 0.5% interest rate spread, financial institutions are making $13.7 million PER DAY for every trillion dollars floating around in the system. Readers can work the math on other rates and amounts. If you factor in payment fees running 2-5-3.75% then blockchain operated payment transfer methods that charge a 'mere' 1 percent start to look very attractive to small business and the unbanked.
Turn that notion into a single, global digital currency that's accepted as a token of value in exactly the same way your dollar bill is accepted and it's a small hop to global financial market disruption and massive efficiency gains in the cumbersome financial supply chain.
It is that combination that makes the case for blockchain technologies so appealing and explains $349.03 million that was poured in as investment in 2014 and $229.34 that has been invested to date in 2015.
Unfortunately it's not all plain sailing and my sense is that we're entering the end of the beginning which saw Birtcoin blossom as a digital currency in 2011-13 but which since has had a very rocky ride.
Despite the enthusiasm, there's still plenty of confusion in the general market.
In December 2013, Bank of America Merrill Lynch claimed:
Bitcoin may "emerge as a serious competitor" to cash in e-commerce and digital money transfers.
In a continued attempt to compartmentalise Bitcoin, David Woo, the global rates head at Bank of America Merrill Lynch appeared on an episode of "Bloomberg Surveillance" where he espoused the use of Bitcoin the payment system while writing off bitcoin the unit of account as something one should not invest in.
That kind of thinking is inevitable when the technology is so inextricably linked to a currency that is so volatile. It isn't stopping the smart money from continued investment as noted above.
- Financial technology is one of the great largely untouched areas of commerce that is ripe for disruption. People are asking too many questions about the fees that are forced upon them by the banks. The banks operate archaic systems that a cynic (like me) might say works well to oil the wheels of profit and loss accounts but which will be seriously threatened by digital financial technology.
- UBS is sounding the warning bell - others will follow.
- As Phil Wainewright alludes in his piece last year, it may take many years for blockchain related technologies to bear significant fruit.
- Regulation moves very slowly in the financial world, and while we hear the excusers of 'risk and governance' technology will not stand still.
- The inexperience of the past won't be carried into the future and my guess is that regulators will wake up to find themselves adapting out of necessity, not desire.
- The possibilities and potential for blockchain technology are extraordinary at every level of business and society. If you're not keeping up then you should.
- The global banks will want to 'own' this technology set but for as long as the blockchain remains as open source then nobody owns it.
Endnote: I just noticed that NetSuite has an add-in for BitPay - nice.
Disclosure: NetSuite is a premier partner at time of writing.