The modern financial system has a fundamental problem: It’s not designed for the Internet. Even though money and transactions are becoming increasingly digitized, we keep using payments rails that were originally designed for paper checks. And, in some ways, the financial system is less than compatible with the online world people are shopping and transacting in.
A good example of this conundrum is how the Internet has affected payments security. JPMorgan Chase, which suffered a data breach this past summer, will likely double its $250 million annual cyber security budget in the next five years. Our payments rails just weren’t built with advanced persistent threat attacks and malware in mind.
“All of the work that people are doing in cyber security, it’s really people are trying to patch for that problem… that our financial system wasn’t built for the Internet,” Will O’Brien, CEO of BitGo, said yesterday at a Money2020 panel on how traditional payments players can dabble in Bitcoin.
Bitcoin was built for the Internet. Strip away the currency aspect and look at the technology behind Bitcoin, and you have the first Internet protocol for storing and exchanging value. And that protocol leverages the Blockchain, the first open-source financial database that records everything that happens on the Bitcoin network and verifies all of that activity with a third party. The implications of the Blockchain technology could go well beyond payments. So there are opportunities for companies beyond Bitcoin startups to leverage it.
“Bitcoin is potentially the most important technology innovation of our lifetime. It has such far-reaching potential,” Cedric Dahl, CEO of Buttercoin, remarked. “The Blockchain has enabled something that has never been possible before: Two people who don’t know or trust each other can agree that they trust each other with something.”
The Bitcoin Blockchain could be used to verify more than just possession of funds for Bitcoin transactions. It could be leveraged to verify all sorts of records like legal documents. Or it could be used to verify the credit-worthiness of unbanked or underbanked individuals, Adam Ludwin, CEO of Chain.com, commented.
[For more on alternative uses of Bitcoin, check out: Exploring New Use Cases for Bitcoin.]
“The real value of the anonymity of Bitcoin is that you don’t need to know your customer. The Blockchain can substitute for the credit-worthiness of an individual. It can enfranchise people and bring them on to the financial grid,” Ludwin said.
It might not look as if these things are possible yet, as Bitcoin is still in its early days. And Bitcoin companies acknowledge that more innovation is necessary for the Blockchain technology to reach its full potential.
“People need to build and develop on top of the Blockchain for this foundational technology to reach consumers,” Halsey Minor, CEO of Bitreserve, observed.
Given the far-reaching potential that Bitcoin advocates predict this technology will have, there’s no reason banks couldn’t participate in the development and innovation around the Blockchain. While some banks are experimenting with Bitcoin in different ways in their innovation labs, the Blockchain will be the starting point for any traditional financial services provider to have an impact with Bitcoin’s technology, Chain.com’s Ludwin suggested.
For companies looking to dabble in Bitcoin’s technology, “they need to connect to the Blockchain,” he advised. “If you think about what previous Internet protocols have done, they bring down costs and open up new markets. Think about the impact that email and voice-over-IP have had. You need to think in terms of what the Blockchain combined with your brand can do.”
Bitcoin and its technology aren’t perfect; their flaws have been well covered in the media. But those problems are also opportunities for new innovation, Ludwin pointed out. “Those problems are an opportunity for someone… to leverage the power of the Blockchain.”
Banks might be able to take advantage of those opportunities if they’re willing to experiment and take some risks.
Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio