Banking, Cryptocurrencies and Wallets

Rebecca Burns-Callander
Principal OP Author

Crypto is a topic that polarises. People tend to have strong feelings about the nascent industry, either proclaiming it the future of finance, or else slamming it as hype – or worse.

Indeed, some pundits even experience an inner struggle when it comes to their feelings about cryptocurrency and/or the blockchain. “My rational self says that most people neither know nor care about crypto,” says Ammar Akhtar, founder of Shoreditch-based fintech start-up Yobota. “My idealist self is passionate about crypto as a force to drive fundamental change.”

When it comes to the impact of crypto on the bank account specifically, it is even harder to find consensus. The big banks, which began ploughing resource into blockchain labs and crypto research teams a few years ago, seem to be pulling back (all save the traders, who enjoy speculating on the volatile currencies).

“My rational self says that most people neither know nor care about crypto,” says Ammar Akhtar, founder of Shoreditch-based fintech start-up Yobota. “My idealist self is passionate about crypto as a force to drive fundamental change.”

According to Akhtar, this is because crypto and traditional finance are uncomfortable bedfellows for two main reasons. “Most banks operate in silos with a high degree of privacy,” he explains. “Rightfully so: it’s people’s money and they want a high level of privacy. But if you think about blockchain and the distributed ledger, it requires lot of anonymised participants to agree that transactions have taken place and open up the process. It’s a completely different mindset and the infrastructure itself is incompatible with traditional banking systems.

“It also takes an arbitrary amount of time for cryptocurrency transactions – especially bitcoin – to be processed,” he continues. “ Does anyone really want to pay for a cup of tea and then four hours later be called back because the payment didn’t clear for whatever reason?”

Bitcoin, the most well known of the blockchain technologies, has achieved widespread renown because of the meteoric rise in its value since its inception in 2009 - yet the average man on the street is unlikely to own the cryptocurrency or have any idea how to get one.  Yet there must be some people frequenting all the bitcoin ATMs that cropping up all over the place. There are now more than 3,000 worldwide, up from 1,000 at the start of 2017.

Over the years, many respected business leaders – from Bill Gates to Richard Branson – have commented on the potential of blockchain and cryptocurrency to bring about revolution. Yet these technologies remain on the fringes of the finance world. Stripe, the payments processor, stopped allowing bitcoin transactions earlier this year, and you still can’t pay with cryptocurrencies in most major retailers - or even on the biggest e-commerce platforms.

Insiders from the crypto industry argue that this is symptomatic of crypto being in its infancy – any new technology takes a while to mature and become mainstream.

According to Kevin Murcko, CEO of cryptocurrency exchange CoinMetro, change is round the corner. He claims that cryptocurrencies are now being embraced by the new wave of banking start-ups as a point of difference with the old guard.

“The ability to trade and exchange cryptocurrency is already a core feature of one popular app-based challenger bank,” he says. “I think it’s likely that in the coming years – for fear of being left behind - we’ll see other challenger banks, and indeed, well-known high-street banks, following suit.”

George Bevis, the founder of challenger bank Tide, has a different opinion. “Cryptocurrencies definitely won’t be around by 2030,” he says. “Crypto has had 10 years to prove itself and no one’s using it for anything except money laundering and speculation.”

His comment shows that cryptocurrencies have two major problems right now. The first is price volatility. If you look at the price performance of bitcoin over the past year, the stalagmitic graph shows that, after hitting a peak of $20,000 at Christmas, bitcoin’s value has sunk to $6,479 at time of writing.

The second problem is one of reputation. The irony of this is probably not lost on Satoshi Nakamoto, the quasi-mythical founder of bitcoin, who invented the currency as a reaction to widespread mistrust of fiat currencies and the financial establishment.

Nakamoto is quoted as saying: “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”

Yet repeated hacks and ICO scams have marred the cryptocurrency industry in recent years, prompting many finance pundits to dismiss it completely.

Lord Adair Turner, former chairman of the Financial Services Authority, now adviser to new small business bank OakNorth, comments: “When I look at bitcoin, it is two things - neither of which the world needs. It’s an arbitrary store of value. Its price is what people think it is at that time but it has no economic function.

“Separately, bitcoin allows the anonymity of a store of value within the digital space. You don’t see who owns the coin. That’s fine but what is the social impact of having that? The only people who want an anonymous store of digital value are criminals, tax avoiders, terrorists and criminals. I’m perfectly happy to have a traceable store of value because I pay my taxes and I’m not a terrorist. These crypto currencies aren’t adding anything to society. They are interesting as a technology but that doesn’t make them useful. I don’t think that cryptocurrency will transform our economy.”

Yet the success of bitcoin and other cryptocurrencies does not depend on the faith and support of the establishment. On the contrary, these technological treasures were created to circumvent the existing financial system entirely.

Future generations may decide to dodge having a bank account altogether, opting instead for crypto wallets, where they can accept and send payments, safe in the knowledge that no bank is tapping their balance and making money out of their savings. But the pace of change will be slow – possibly much slower than our time horizon of 2030.

Most people are very risk-averse when it comes to their money, after all. As Yobota’s Akhtar notes: “If all your money was suddenly turned into cryptographic hashes and you were told it was only stored in a digital wallet on your phone, you’d probably be horrified.”

Adam Ludwin, founder of San Francisco firm Chain, which builds cryptographic ledgers for the financial industry, argues that the moniker “cryptocurrency” is a fallacy because technologies like bitcoin aren’t comparable to the pound, euro or yen. He says that cryptocurrencies are, in fact, an entirely new asset class.

“Crypto assets are a new asset class that enable decentralized applications,” he explains. “A decentralized application is a way to create a service that no single entity operates. [It] allows you to do something you can already do today (like payments) but without a trusted central party.”

Ludwin believes that the potential applications of this powerful technology have yet to be realised – mostly because we’ve all been so distracted by the crazy values realised by cryptocurrencies like bitcoin, and all the noise around hacks and scams.

Antony Jenkins, former Barclays boss, now founder of fintech start-up 10x, agrees that crypto has not yet had its day. He says: “I suspect that many of these new cryptocurrencies will not exist in their current formats in future, but it is not inconceivable to me that we will see a V2 or V3 of crypto having significant impact on the world, especially in international payments, and through the internet of things, which may require machines to pay each other for services without human interference.”

Blockchain, despite being the foundation of cryptocurrency, needs to be treated as a separate phenomenon. For the uninitiated, think of blockchain – also called the distributed ledger – as a virtual whiteboard that stretches into infinity, on which every transaction is noted - albeit with the data totally anonymised - in indelible ink.

Over the past decade, blockchain has been hailed as a revolutionary technology that could disrupt every industry. But that revolution hasn’t quite materialised yet. According to Lord Turner, this may be because it hasn’t been applied in the right way yet.

“Blockchain technologies are useful for achieving assurance about who counterparties are and how they transact in a way that is safe and double-checks the integrity of your counterparty,” he explains. “This technology is likely to significantly reduce transaction costs in payments and trading. However, one mustn’t overstate how important that is in the bank payments space.

“For most individuals, their payments are provided for free as a by-product of the bank account. If you are an SME sending £1,000 to a supplier in France, you get charged £25 for the payment, which is not insignificant. But new players now move that money for £1 instead of £25, removing that charge without blockchain. And now HSBC is saying it won’t charge anything for international transfers. People like to talk about how they are getting ripped off of transfers but when you run the figures they are not huge.”

CoinMetro’s Murcko believes that the application for blockchain extends beyond transfers, however. “Regulators are now seeing that transaction monitoring on the blockchain is far more substantial than with traditional payments,” he says. “Thus, in the future, they may actually push banks to utilise blockchain in their payment infrastructures.”

One of the standout case studies is Etch, a new payments system that allows companies to pay their staff as they work, through the use of crypto tokens. The system plugs into the existing payroll network, and allows employers to release a steady trickle of wages to its staff.

Over the past few months, we have been on the hunt for companies that are using crypto or blockchain as part of a radical new business model that improves on the existing bank account model. The catch is that it must have widespread appeal and a clear business case – beyond altruism, worthy though the endeavour may be.

One of the standout case studies is Etch, a new payments system that allows companies to pay their staff as they work, through the use of crypto tokens. Founder Euros Evans explains that the system plugs into the existing payroll network, and allows employers to release a steady trickle of wages to its staff. “You can come in on a Monday with a bank balance of zero and, by lunchtime, have enough money to buy lunch,” Evans explains. “In competitive industries with staff shortages, something like this could radically help with attraction and retention of staff.”

Etch has created a “smart contract” which details the rules of these transactions. Put simply, the employer pays the wage and Etch converts into a proprietary token called Pier, which is anchored to the value of a UK basket of goods (using either the Consumer or Retail Price Index). This system should make the token more stable than those linked to the pound, euro or dollar, Evans argues, and also accounts for inflation, meaning that workers are actually better off when their wages are converted back from Pier.

Etch makes its margin through the trading of Pier tokens but their underlying value in the real-world remains unchanged. Stability is paramount in this industry; you do not want the value of your wage to drop 10pc overnight. Finally, the token is converted back into a fiat currency and deposited, in real time, in the employee's bank account as they meet criteria set by the business.

“The first few pounds may hit their account when their vehicle pulls into the company car park, or when they log in to their work email account,” explains Evans. The cash stream can also be diverted overseas to dependents and loaded onto prepaid cards anywhere in the world without being subject to transaction fees.

The system is complex but opens up a world of possibility for both employer and employee alike, Evans claims. “Our first client is a cleaning company called JPC in London,” he says. “They have 3,000 staff in the UK. Because of the nature of the industry, to be competitive, many staff are on minimum wage. But because JPC is a family company, started by a former window cleaner, the company sees any opportunity to help its staff manage their finances as a no-brainer.

“Some 80pc of staff are migrant workers so many need send money home quickly for emergencies. But when you do that, you can be clobbered with high fees. We do that seamlessly as well in real-time so it’s an added benefit.”

Etch has also been approved by the Construction Blockchain Consortium, which boasts members such as Laing O'Rourke, Balfour Beatty and Skanska.

Companies need to have at least one month’s worth of wages in accessible cashflow at any time in order for this system to work for them. “Just by using Etch, they are reassuring employees that they are on firm financial footing,” says Evans. “For the employees, bills could be paid in real time as they earn, reducing interest payments and giving them access to more favourable rates.”

Evans believes that his company will spawn what he terms “the Etch economy”. At the moment, wages are transferred into a traditional bank account but could easily go into a wallet or entirely new cache of value. “What I’m hoping is that people will come along and build their own systems on the Etch platform for payroll or energy supply or any industry where payments or transfers are made,” he says.  

For the longest time, a major argument against crypto has been that while the technology appears to be a solution to something, the precise problem has yet to be articulated. Yes, it could democratise money and move power away from the established financial institutions – yet those same powerful organisations can also stand in the way of its progress. Almost a decade on from the birth of bitcoin, companies like Etch are finally using this technology in a meaningful way. Only time will tell if the revolution is finally here.