Experts say Scotland should adopt blockchain technology, or risk losing tens of thousands of jobs and hundreds of millions in earnings

The Strathclyde Business School Centre for Financial Regulation (SBS) recently issued a warning that Scotland’s financial sector needs to accelerate its adoption of technology to avoid a future banking crisis.

“Fintech is being driven by two major innovations – blockchain, and distributed ledgers,” the recent announcement states. “[The technology] has the potential to create nearly 15,000 jobs in Scotland over 10 years. But failing to adopt leading-edge technologies would have the opposite effect, with a loss of just over 14,000 jobs.”

The warning preceded a conference in Scotland last Friday, “The Future of Fintech,” supported by Glasgow’s International Financial Services District and Scottish Financial Enterprise. SBS published a conference paper for the event, “FINTECH in Scotland: Building a digital future for the financial sector,” which sets out how the industry is changing and what needs to be done to capitalize on it.

“The cumulative ten year cost to the total salary bill of inaction could be as high as GBP 597 million. The cumulative ten year benefit to the total salary bill if Scotland gets it right could be as high as GBP 1,1 billion.”
— – Strathclyde Business School

Founded in 1948, SBS is one of four faculties forming the University of Strathclyde in Glasgow. The faculty is one of only five in the UK to be awarded a Gold Small Business Charter Award, from the Chartered Association of Business Schools (CABS), “for its excellent work in supporting Scottish firms scale-up through innovation, internationalisation and leadership.”

Director of the SBS Centre for Financial Regulation and Innovation, Daniel Broby, states that Scottish banks and fund managers are already using FinTech. However, it’s largely developed in house and isn’t cutting edge.

“The gradual trend has been for traditional banks to move to off the shelf solutions and to leave the in house developed legacy systems,” the SBS paper clarifies. “We argue that this should be accelerated.”

Broby says that FinTech could be a game changer for both the banking and securities industries. “Financial transactions are set to become instantaneous, traditional paper money is being replaced by digital money, and entrepreneurs will be able to raise money directly from the public. All this is good news for the consumer.”

“The technology exists. Either Scottish financial institutions adopt it and thrive, or they ignore it at their peril.”
— – Daniel Broby, Centre for Financial Regulation and Innovation Director

The United Kingdom is a world leader in Fintech, according to the House of Commons, with the sector estimated to be worth £20 billion in annual revenues. The UK Government has identified this as a priority area and instigated many initiatives to support competition and innovation across financial service providers.

Ernst & Young (EY) estimates the startup element of Fintech revenue to be around £6bn. The multinational professional services firm, headquartered in London, states that “Much of Emergent Fintech is focused on a small number of sectors (for example peer-to-peer platforms, payments,capital markets), however we believe there is a huge amount of white space open to disruptive and innovative models”

“We describe Traditional Fintech as ‘facilitators’ (larger incumbent technology firms supporting the financial services sector) and Emergent Fintech as ‘disruptors’ (small, innovative firms disintermediating incumbent financial services firms with new technology),” states EY. “The UK is poorly represented in Traditional Fintech (four out of the top 100 globally), but is strong in Emergent Fintech (one half of all promising start-ups in Europe).

The SBS paper highlights the London ranking, while reiterating that it’s not the leader in Fintech In comparison with London. “This represents an opportunity for Scotland as the industry is still nascent,” the paper explains. “Organizations in Scotland have a closer network and therefore the potential for more flexibility and agility.”

Scotland has a number of support services to promote the development of talent and innovation, such as DataLab, CodeClan, Informatics Ventures, Skills Development Scotland, Glasgow Economic Leadership and Strathclyde University’s Hunter Centre for Entrepreneurship.

There are also a growing number of incubator programs, including CodeBase, the UK’s largest technology incubator based in Edinburgh, and Scottish Enterprise which provides training and support.

“For Scotland to be successful in Fintech, it needs the skill, infrastructure and vision to capitalize on blockchain and its financial institutions understanding of virtual ledgers. We believe blockchain will transform how financial transactions are recorded, reconciled and reported.”
— – Strathclyde Business School

The paper makes it clear that a Fintech plan, and its execution, will determine whether Scotland joins the winners or losers in Fintech adoption, “Fintech will facilitate new processes and architecture that will make digital settlement cheaper, simplifying back-end processes, all key areas for the Scottish financial sector.”

“To be successful in Fintech Scotland requires an all-round approach to technology adoption and usage,“ the paper qualifies. “The sort of technology that might prove successful is a funded digital wallet linked to an existing or disrupter bank account.”

SBS recommends that support for a Scottish cryptocurrency takes a leading role in making Scotland as a digital hub. “As yet, no large government has backed a digital currency and we suggest this may well be something that could make a difference for Scotland.”

“The place where Fintech brings together all its technologies and which holds the most promise for the future is in a global crypto currency. The case for this is self-evident and its long term adoption a likely outcome of the internet.”
— – Strathclyde Business School

In most countries only central banks are permitted to issue currency. Scottish banknotes, however, are not technically legal tender, even in Scotland. The notes are issued by the Bank of Scotland, Clydesdale Bank, and The Royal Bank of Scotland. SBS claims that widespread use has established “a precedent which can be built on.”

A Scottish cryptocurrency would have to be an encrypted distributed ledger run by the three banknote issuing banks, the paper argues. “The Scottish payment system currently exists without a legal framework [..] This legal ambiguity can be used to issue Scottish digital currency, backed by deposits from these currencies with the Bank of England. The Scottish Parliament would have to support the initiative and presumably pass legislation on cryto-currencies to ensure its success.”

The idea has is far from new. A leading Scottish think tank, the New Economics Foundation (NEF), proposed a parallel Scottish currency late last year. ScotPound was described as fully digital in nature and used much like mobile cash options we have today. “Scotland is in a unique position to take full advantage of current trends in digital financial innovation,” NEF researcher Duncan McCann told Scottish Financial News.

“A new currency and payment system like ScotPound would operate alongside pounds sterling, supporting small and medium businesses and putting money in the pockets of those currently excluded by the financial sector.”
— – Duncan McCann, New Economics Foundation

ScotCoin, on the other hand, is a cryptocurrency that uses the counterparty token system. It was started in 2013 and project members have been distributing the coins ever since. Interestingly, they offer 1000 free ScotCoins to anyone who requests them.