Adoption or appropriation? Banks and institutional money want blockchain, but on their own rules
A sizeable number within the crypto community see tremendous potential for enormous pre-existing companies, in particular banks and tech giants, to adopt cryptocurrencies in processing payments, organising their supply chains, dealing with customer identification and more. Very often the underlying assumption is that the technology offered (usually by their platform of choice) has such obvious benefits for time and cost efficiency, that it would be a no-brainer for these companies to test and begin implementing such blockchains. The logic there has merit — certainly blockchain platforms can compete comfortably with legacy payment systems and single-point-of-failure architecture, although it comes with problems of its own.
What we have begun to see, however, is that incumbent industry leaders are more enthusiastic to implement blockchains they can completely control — be it a stablecoin, a private permission blockchain or some hybrid of the latter and public chains. There are obvious reasons for this. For starters, companies are unlikely to want a full list of their outgoing and incoming transactions displayed for all to see. Such an event would show clients how much their competitors are paying or being paid, innocuous transactions will begin to draw suspicion, and more importantly, regulation may prevent the ability to store any customer information on blockchains. Instead, the old money of finance may tend towards creating or adopting blockchain models customized for their use cases. Three cases are discussed here, ranging from a completely in-house model to collaborations between incumbents and blockchain platforms.
J.P. Morgan coin
We witnessed this phenomenon in full force this year, when in February J.P. Morgan announced that they were testing a blockchain platform to process payments. The company claims to have an average daily volume of $5 trillion, so immediately the prospect of a fraction of this taking place using distributed ledgers becomes a de facto legitimation of the industry. With that said, the bank was crystal clear on the nature of the blockchain they would adopt: their own, with the full ability to maintain full control. It is also a stablecoin, not a cryptoasset used for speculation and trading on secondary markets. With this, J.P. Morgan can have the best of both worlds: it can avail of the speed, security and reliability of blockchain protocols without inviting prying eyes to their balance sheets or running afoul of regulators unless something goes drastically awry. This drew the ire of many within the crypto community, with CEO of Ripple Labs Brad Garlinghouse saying J.P. Morgan “missed the point” of crypto. As we will discuss, Garlinghouse might well say that, but no doubt JP Morgan sees this as far more palatable than adopting a pre-existing crypto platform.
IBM & Stellar
Just this week, a similar situation occurred when IBM announced a World Service for 40–50 banks based on Stellar (XLM), and this led to a sizeable increase to the value of XLM tokens. IBM has been working with blockchain for some time, and has offered a hyperledger-based blockchain-as-a-service (BaaS) to clients since July 2017. The company’s head of blockchain Jessie Lund announced the plans in an interview with Finder, though the comments were later removed from the video. That may draw skepticism, but it is reasonable to assume Lund was supposed to hold the announcement for the Money 20/20 conference in Singapore on March 19th, as was suggested in the interview.
Again it is unlikely for the banks involved, spread across more than 50 countries, to use XLM directly. However, if each bank creates a fiat-backed stablecoin and uses XLM to exchange between them, this will still increase the volume of the currency transacted and potentially affect the circulating supply in a way favourable to holders. If this is what transpires, it may well be a win/win situation for IBM’s partnering banks and the blockchain industry (which Lund has been an advocate for in the past, predicting an eventual $1 million Bitcoin valuation).
Lastly, perhaps no platform has pushed harder for traditional industry adoption of crypto than Ripple Labs. The platform has built an impressive list of partners using or testing Xrapid for cross border payments, some of which are specialist banks (Euro Exim as one example). Even Western Union and Moneygram have been experimenting with the platform for their remittance services. As controversial within the industry as XRP is, the gateway system and the ease of liquidity are contributing factors in Ripple’s success in getting existing financial service institutions on board. With that said, there remains a number of roadblocks for these adoptions. For starters, XRP is still immutable, so unlike traditional financial transfers it remains irreversible, or impossible to claw back in the case of fraud. The lack of partnership with big-name industry leaders also creates uncertainty, as does banking giants like JP Morgan going their own way. Little surprise, then, that Ripple execs were critical of the move.
Adoption might be coming, but that’s no reason to wait for it
We published an article last month listing some of the largest companies in the world experimenting with blockchain in some form or another, and it stands to reason that many of these experiments will end in real adoption and use. But for many of these, and banks in particular, the adoption will be made very much on those companies’ own terms. It is for that reason that blockchain platforms would do well to focus on creating new industries and services, instead of relying on old money.
Article by Byron Murphy, Editor at Viewnodes. All opinions are the author’s alone. Viewnodes helps clients establish and maintain masternodes for the currencies which currently support them. To contact us for information on our masternode services, please submit this contact form.