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The spectre of cryptocurrency is spurring banks into action


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Today, banks are enthusiastic about digital currency; yesterday, they were writing it off.

Goldman Sachs is weighing the idea of launching a cryptocurrency of its own, CEO David Solomon said late last week.

"Assume that all major financial institutions around the world are looking at the potential of tokenisation, stablecoins and frictionless payments," he said.

It's kind of funny because, in early 2018, Goldman Sachs shrugged that "in most areas of the world where we have well-functioning fiat currencies and reliable banking systems, there just doesn’t seem to be a need for digital currencies."

But now the bank "absolutely" could follow in the footsteps of JP Morgan by launching its own cryptocurrency, Solomon said.

Speaking of which, JP Morgan's stance on Bitcoin went from "If you're stupid enough to buy it, you'll pay the price someday" to the analysis of Bitcoin's price as an asset with intrinsic value to launching its own cryptocurrency in the space of just a couple of years.

"We're going to have competitors, whether it's a cryptocurrency competitor or another FinTech competitor. We're going to have competitors," JP Morgan CEO Jamie Dimon said last Thursday. "I tell our people, don't guess, you know they're there, you know they're coming, you know they want to eat our lunch. Assume it."

Of course, in September 2017 he was saying he'd fire any employees who went long on Bitcoin for their sheer stupidity.

European banks had an even quicker 180 moment with the reveal of Facebook's Libra cryptocurrency.

In a paper published by the European Central Bank on 20 May 2019, it reiterated that cryptocurrencies do not pose a material risk to financial stability in the euro area. Then literally a month later, banks were issuing dire warnings about how Libra must not be allowed to displace the euro, and France created a G7 Libra task force led by a European Central Bank board member.

Libra's reveal also electrified commercial banks around Europe.

"[Facebook] come[s] with a global solution, under a global brand offering many things that the consumers seem to find wonderful... so we have no time," said Etienne Goosse, director general of the European Payments Council. "The clock is ticking."

Opinion: It just goes to show

The turnaround from Europe's banks is kind of funny because Facebook's cryptocurrency was an open secret for well over a year prior to its reveal, and none of the broad strokes of the project came as a surprise when it was finally revealed. So why should the reveal of a whitepaper – not even a functional product – spur such a drastic change?

It's like everyone thought Libra was all just one big practical joke until the release of the whitepaper. What was in the Libra whitepaper, and not already known, which caused such drastic change of sentiment?

Similarly, JP Morgan and Goldman Sachs opposed and then embraced the exact same concept of digital currency. The technology and principle remained the same, even as the bank's opinion made a complete revolution around it.

This is indisputable evidence, of a sort, that you simply cannot trust a bank's opinion on whether a certain technology is useful. If a bank previously said digital currency wasn't practical, what they really meant was that it wasn't profitable for them.

One uncharitable explanation for this is that too many banks are too self-involved to realise that charging fees is not actually a valuable service, and that they're not untouchable. An equally uncharitable interpretation is that they were deliberately trying to squelch a threatening fringe technology and would have gotten away with it too if it weren't for those darned kids.

The truth is probably a bit more complicated.

As the old adage goes, people will believe anything when their job security depends on it. And banks are complex beasts with a lot of moving parts – some of which are quite old and rusty – and international payments are a team effort that entire banking networks need to unify around. In that environment, you can't always just decide to disrupt yourself even if you know it will let you produce a better product.

And yet, a lot of banks very confidently said that this cryptocurrency thing was just a passing fad with no practical use. For some reason, it only became useful when it really started posing a business threat, and the idea of giving customers cheaper and faster payments only became worthwhile when it looked as though someone else was going to do it first. It just goes to show that you have to take everything with a grain of salt, and that banks are most definitely not the repository of all fintech wisdom.

But most importantly, it also reflects an ongoing failing of the banking system. Banks are essential public services, but they're also massive for-profit companies, and these recent events make it clear that they will actively, if unconsciously, resist any innovations that threaten their bottom line. It's also clear that healthy competition can spur innovation, but also that a bank-dominated market isn't especially healthy. We can't rely on a paradigm-shifting technology like cryptocurrency to come along whenever we need to shake up a stagnant market.

Unfortunately, it seems like we have a lot of established bodies to cut the corners off digital currency and blunt its edges, but very few to actively encourage genuine competition and innovation in a stagnant industry.

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Disclosure: The author holds BNB and BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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