The financial services sector goes back and forth on bitcoin. Will it take off or be a monumental flop? Will it threaten the role of traditional banks? Will the cryptocurrency change everything we know about payments or silently fade into irrelevance?
Citi Bank has just offered its own take on the debate. In a U.S. Digital Banking report published last week, Citi’s Could The Bitcoin Blockchain Disrupt Payments? examines how the technology will threaten traditional banks’ role in the economy – if at all.
To put it simply, Citi concluded that while the technology behind bitcoin, combined with other innovations, may “radically” change finserv, bitcoin is far from a threat to banks – instead, it should be viewed as an opportunity, the FI said.
Many of the use-cases proposed by the industry for blockchain – like cross-border remittances – don’t actually see their traditional sources of friction solved by the technology, Citi said. Instead, areas in payments like supply chain management are a more likely candidate for disruption by bitcoin and blockchain.
Citi’s conclusions are a far cry from some of its peers.
Last year, for example, the British Banking Association concluded in its own The Digital Disruption: UK Banking Report that cryptocurrencies are challenging traditional banking operations.
“As they grow in popularity, so too will the risks for banks,” the BBA concluded, pointing to bitcoin’s use for illegal activity, its volatility, and – at the time – relatively low market cap.
Things have changed in the last year, and that is reflected in Citi’s report. While the bank found some cause for concern (“We do view a central-bank issued digital currency as a significant threat to the banks’ central role in payments…”), that threat is neither imminent nor guaranteed (“…But this seems to be a very long tail risk”).
Where Bitcoin Falls Short
Corporate software firm FIS recently released data on the rising demand among corporate treasurers and CFOs for centralized payment systems. According to Citi, bitcoin is unlikely to emerge as a superior alternative to existing centralized systems.
“When we compare Bitcoin to centralized systems on messaging, settlement and regulation, we believe that overall centralized systems come out on top, and consequently we do not believe that banks and the card networks are at risk from disruption,” the report stated.
And while bitcoin is often cited for its potential to enable real-time payments, Citi notes that the technology for such an achievement is already here – it’s a matter of streamlining payments systems standards and reinforcing national payments infrastructure, the bank said.
The U.S. Federal Reserve is weighing heavily in the movement towards real-time payments as the nation’s Real-Time Payments Task Force takes the lead on the initiative. But, as Citi points out, the Fed has only casually mentioned blockchain technology in this arena – its distributed ledger technology, however, may prove more relevant.
Where Bitcoin Could Make Its Mark
One of the most commonly cited use cases for bitcoin is in the remittance space, especially across borders. But Citi points to one fintech company, BitPesa, which has begun to shift its attention from P2P payments and remittances to B2B payments.
“Bitcoin has allowed BitPesa to break ground in the business with low cost startups,” Citi’s report noted, pointing to the company’s expansion to help companies in Africa access a faster payments system than what is currently provided by traditional banks.
“In countries where there is no quality payments infrastructure, we do think there could be some opportunity for an open decentralized network like bitcoin,” the report said.
While bitcoin probably won’t threaten the industry dominance of existing cross-border remittances companies like Western Union, or the banks or credit card networks, Citi established that the true potential in bitcoin is probably within its ability to interact with other technologies.
This means that existing, traditional FIs can take advantage of bitcoin and blockchain technology to make their own jobs easier – and not fear that their jobs will be taken over entirely by these tools.
“In our view,” Citi concluded, “the best use for blockchain technology is where multiple parties need to trust and share information. Specifically, the ability to avoid third party intermediaries thanks to a trusted distributed ledger with an immutable transaction history can offer cost savings for financial institutions who currently must expend a lot of effort to reconcile data.”