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Bitcoin and Banks – The Race Is On

Banks are playing catch up with Bitcoin, which they initially shied away from. Bankers are shedding their legacy cloaks and moving to blockchain technology, to stay in the game.

In 2008, an individual or group writing under the name of Satoshi Nakamoto published an open source program outlining the Bitcoin protocol. It ushered in a new era or peer-to-peer data exchange, providing a financial infrastructure that no longer depends on central institutions, specifically banks.

Over the years central authorities have reacted cautiously to what was then an unregulated exchange of value. Banks issued warnings to consumers regarding the currency driving the new standard. In 2013, during a period of unprecedented bitcoin price highs, the Bank of France released their opinion on the risks related to the digital currency.

"Even if bitcoin is not currently a credible investment vehicle, and therefore does not pose a significant risk to financial stability, they represent a financial risk for those who hold them."
— – The Bank of France

The mainstream media’s focus on the illegitimate aspects of the digital currency industry detracted from the new financial paradigms potential. Now banks are turning their heads, shaking off the dust and experimenting with a range of bitcoins features.

Blockchain transactions are faster, cheaper, and globally accessible. The French bank and financial services company BNP Paribas, which claims to be “the bank for a changing world”,  recently released an article explaining the benefits of disrupting the legacy banking systems, in their magazine Quintessence.

In the article, written by Research Analyst Johann Palychata, two scenarios are outlined. “In its purest form, a distributed blockchain system allows all market participants direct access to the DSD (Decentralised Securities Depositary), to the exchange and to the post trade infrastructure (clearing & settlement).  If this setup develops then existing industry players might be redundant.”

The second, explains Palychata, is integration with the post trade infrastructure. “In this scenario custodians or settlement infrastructures might use the blockchain to record the ownership and trades between themselves; however end investors will still need to use a custodian to have access to the market.”

Banks around the world are showing ever increasing interest in utilizing the blockchain technology which underpins the bitcoin currency. Barclays recently ran a 13 week accelerator programme which included three blockchain based companies; online cryptocurrency exchange Safello, bitcoin-based debit card creators Atlas Card, and the diamond tracking service using blockchain technology Everledger.

The Swiss Cooperative KPMG, with US$26.5 billion in revenue, have been delving into the challenges behind three fundamentals of retail banking – lending, deposits and payments. In a report released early this year, The Changing World of Money, the Head of Alternative Banking at KPMG, Warren Mead, explains banking is approaching what he calls the ‘e-book moment.’

“There are strong parallels with the recent disruptions in publishing and the book market, where the combination of powerful new entrants to the market, especially Amazon, and changing consumption patterns driven by new technology (in particular e-readers, such as the Kindle) have transformed the business. Five years ago, 96.1% of books were sold in printed format but by last year that had fallen to 85%.”
— – Warren Mead, Head of Alternative Banking at KPMG

Mead goes onto explain that bitcoin is one of the challengers in the financial industry, and worth paying attention to. “In the face of this new wave of disruption it is more than likely that the major banks, with their smart employees and deep wallets, will swiftly develop the products and services that allow them to become ‘fast followers’ that with their long-established customer relationships and brand reach will make them strong challengers to the challengers.”

Other challengers, often Blockchain based companies, are entering themarket with a slew of innovative products. Some are embracing traditional lures, including interest bearing deposit accounts, and competitive loans.

BTCjam is a peer-to-peer lending network that implements a risk-based interest model. This form of pricing is widely used by lenders in traditional financial service industries. The interest rate is determined by a credit score completed online. The higher the score, the lower the risk, and therefore the lower the interest.

"Since BTCJam has all of the information about the borrower’s, we are in a better position to determine the likelihood of the borrower paying back the loan and will adjust the interest rate accordingly."
— – BTCJam

BTCJam also recently announced Autoinvest, their automatic lending tool. The tool is designed to make investing simpler and less time consuming. It gives lenders the ability to diversify their investment portfolio amongst hundreds of loans, spreading the risk of default.

If you have an official government ID and a proof of address then you can apply for a loan on BTCJam. It isn’t restricted to a country of residence either, the platform is accessible globally.

“Most developing countries do not have a national credit scoring system and their citizens are unfortunately subject to aggressive predatory lending practices.”
— – BTCjam

Earning interest on Bitcoin has also been an ongoing topic of discussion in the industry. is a cryptocurrency platform based out of London, that recently rebranded as Magnr. Colin Kwan, COO at Magnr, spoke to BraveNewCoin about creating the Bitcoin Financial Services platform.

Kwan’s attraction to Bitcoin came from his background in IT and investment banking. “There are a lot of inefficiencies in investment banking. It comes down to manual processing in the back office.”  Kwan believes that Bitcoin has the ability to disrupt both traditional and investment banking.

The Magnr model is designed to pay out 2.18 percent per annum, on up to 10BTC. The interest is compounded monthly.  “The traditional model of banks is to pretty much lend out their funds to mortgages, or whatever they may be, to get the funds from the mortgages to return to the customers. In a similar way we are doing the same thing,” Kwan explained.

The Magnr business model uses funds from their trading platform to supply the 2.18 percent interest. The bitcoin deposits can be lent out, for a fee, to traders. “Just like any financial service we are providing an interest return, we have to actually make those funds to create the interest return,” Kwan said.

This simple mechanic, and achievable interest rate, works regardless of the price of Bitcoin. Kwan explained that there is a direct correlation between trading activity and price, “when the price goes up, there is a lot more interest in Bitcoin. This you can see very easily in all sorts of statistics,  number of wallets created, number of tweets,and media attention all spike. This correlates to more people being interested in what we do.”

Magnr is attempting to position themselves as the ‘go-to’ cryptocurrency financial service. Kwan explained that, “there are many people without bank accounts around the world however they have cash that they need to use. Not only to maintain their lifestyle, but to invest. Right now they just don’t have that.”

Banking the unbanked, and more efficient systems, are essential in this technological age. If a service provides what the customer wants at a lower cost, it will almost always draw in more clients.

”The big five banks (Barclays, HSBC, Lloyds, RBS and Santander) could lose over 10% of their lending market share from 2010 to 2020, if current growth rates continue.”
— – Warren Mead, KPMG

Mead goes on to clarify the current situation for Bitcoin, and just how far its come, “the forces combining to challenge the position of the established big name retail banks are the same factors that are shifting the balance of power in many other markets. This process is what Harvard Business School’s Clayton Christensen dubbed ‘digital disruption’. New challenger organisations, from banks to peer-to-peer lenders to PayPal and Bitcoin, are smaller, more agile and quicker to respond to changing trends. With few or no legacy systems and greater responsiveness to customer needs (and with few requirements to offer full-service solutions to non-profitable customers), they can attract affluent, intelligent and profitable consumers.”


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