Photograph by John Willem

Open letter to bank VPs of Development re: Blockchain Strategy

The bitcoin community is full of intelligent, insightful, developers. Incumbent financial officers need not be afraid to integrate or even collaborate with existing blockchains like Bitcoin or Ethereum. Creating a “private blockchain” is an exercise in futility that provides few actionable benefits and does little to improve the industry, as a whole.

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“Blockchain buzz” is something every finance professional should be aware of by now. Whether you are interested in this emerging financial technology or not, it is coming and savvy managers ought to pay attention to what the blockchain can do for their bank.

There are many services boasting hyperbolic claims of fast and straightforward commercial leverage of blockchain; but, most are chaotic and confusing. Within this industry, projects range from working applications to misunderstood concepts and even some that are total fiction. The matter is complex, there are no final answers, but let us assure you that the simplest approach, as in most cases, is best.

Specifically, we strongly advise against wasting resources on in-house blockchain research or, even worse, creating a “private blockchain” of your own. There are much less expensive and more productive scenarios that may bring you new customers and reduce costs in a matter of weeks. You should consider reaching out to the open crypto community and joining an existing toolset. At least, you’ll learn a lot more much sooner for much less.

No Need to Create Your Own. Join!

Open Development Offers Better Value When Adopting Underlying Technologies

Thousands of people hired by bank consortiums worldwide have been working for over two years on this matter. The entire “private blockchain” industry might just be variation of the old open source stuff — at least based on what has been released publicly — not to mention the proposed solutions are years away. “Blockchain technology” is the incumbent finance industry’s “boy who cried wolf”. It has long been promised but never delivered to a single company in a satisfying way due to a lack of practical applications despite many raw and hypothetical projects.

At the same time, millions of self-motivated independent visionaries and coders have been trying to move further with brilliant proposals that also lack actuality. White-papers and other theories are plentiful while real-life solutions remain to be seen. Meanwhile, large labs with unlimited money have been unable to gain any significant traction. Fears of Bitcoin making the incumbent system obsolete made banks hurry to research the blockchain, create VC groups, preventively invest in promising development teams, sometimes even sabotaging certain initiatives by competitors. Alas, the crowd still has stronger potential. Big banks should wait and observe until they know what to fight since they can’t yet join because of the comparatively low capacity of public networks at present. These challenges don’t exist for smaller banks, however, who have the agility and incentive to try new things.

The Importance of the Free Market for Blockchain Technology

Crafting an in-house blockchain may be presented to the board and investors as something making sense. You can manipulate figures, make a compelling sandbox for ideas but at the end of the day, a “private blockchain” is not any better than a restricted financial market. Even the phrase “private blockchain” itself is unforgivably dishonest. The thing is neither entirely “blockchain” nor entirely “private”. Despite being pronounced by highly respected individuals, it is yet an oxymoron.

Blockchain is the precious but rampantly misunderstood mechanism. The original blockchain — Bitcoin — was not meant to cut costs for traditional finance; it was created to reduce consumers’ costs by replacing incumbent finance. This is stated in the first paragraph of the Bitcoin white paper. Anyway, whatever your position is on these controversial issues, it looks like banks may have overlooked the most important concept of this technology: being as decentralized as possible.

What Can Banks Get by Joining Open Projects

Let us get back to the core underlying problem your Board should be trying to solve when applying to the blockchain technology. The ugly truth is no secret any longer:

Half of the world’s economically active population is financially excluded.

Ordinary payment systems are too expensive; economies lose up to 3% of GDP on payment friction.

The industry segment is too complex and fragmented. The two-sided payments market is muddy, manipulative, and oligopolistic.

The market size is a twelve zero figure and the tectonic shift in the industry that is already underway will come and have sweeping consequences.

What can be gained by teaming-up with an existing Bitcoin and Ethereum based platform:

National currencies via decentralized e-wallets requiring no maintenance. Self-sufficient (but still integrated) payment systems with no dependence on global networks such as VISA! A new business leadership role providing merchants with great savings. The complete cycle of services — from money emission to merchant-consumer communication — gives you a great amount of flexibility in tuning up your business model. Merchants are the ones who currently pay unfairly high fees for payment services. The payments industry in almost all countries does not have any clear pricing structure: fees are hidden, merchants are not fully free to choose payments vendors based on normal price/quality reasoning. Change that overnight and become a local hero! Similarly, you can create competitive advantage in the eyes of consumers by offering a new breed of cash that has all great properties of paper cash but is more secure and convenient. Many people are already quite sick of “cashless society” efforts since it usually means allegiance to this or that new-fangled app. Blockchain is a clean and effective answer to these concerns. Low cost instant blockchain remittance and cross-border P2P payments. Low cost settlements within a minute. For restricted or closed-loop markets, blockchain creates a new money transfer business niche. A robust settlement process and ability to optimize workarounds for cross-border limitations will let you cut a good chunk of competitors’ business! Your savings are going to be great. There are 10 to 20 times more people who suffer credit card breaches than those involved in car accidents. Of course, most of the losses are insured and some cardholders may not even notice the problem but at the end of the day, the costs are all yours. Nothing like this ever happens on the decentralized, secure blockchain.

How It Works

The Downside

Being one of the first in this endeavour is not easy. The payments industry is a classic two-sided market case where the payment tools provider is only a catalyst, not a main economic actor. Two-sided networks are economic platforms having two distinct user groups that provide each other with network benefits, thus, the simultaneous growth and involvement of both is needed. The system does not “ignite” if the critical mass is not reached and this problem is usually so great that it eclipses other aspects and difficulties. As of yet, none of the blockchain-based networks have reached high enough adoption level to be able to coalesce both sides of the market. But, there is hope and we are almost there — especially for smaller and denser markets. Whomever decides to fight for these markets stands to gain significantly as an initial adopter.

© Ethereum Cheques