Bitcoin Now Kosher, Card Network Partnerships Suggest
In the few years since bitcoin — the currency and the blockchain framework behind it — became part of the general consciousness, the financial services industry has slowly shifted from ignoring it to considering its potential applications.
Bitcoin has gained a reputation for being too radical for regulated institutions to touch. Instead, the potential of using a blockchain-like system, such as a "private distributed ledger" independent of bitcoin, has been mooted to solve longstanding industry concerns such as modernizing the payment system and securities settlement.
But a handful of developments this month show that the financial companies are not just focused on appropriating the architecture of the cryptocurrrency system, they are interested in what bitcoin itself could potentially do for them, too. In October, the three major card schemes — MasterCard, Visa and American Express — all announced deals investing in bitcoin-related companies and projects. This comes on the heels of 13 major banks forming a partnership with blockchain startup R3CEV in an effort to draw up industry standards and protocols for using the blockchain in banking.
"The climate is right for banks and financial services firms to look at how their operating model can be improved, and this is spurred on by factors such as cost and regulatory pressures," said Joanna Lang, director of platform and research for the startup. "We believe a big key to this is using the technology to build an open, secure, more reliable and flexible ecosystem, which in turn provides more opportunities for cost efficiency and tackling issues like banking the unbanked."
Visa this week announced it has partnered with e-document vendor DocuSign (which is partially owned by Visa) on a proof-of-concept that leverages the bitcoin blockchain for recordkeeping. The project is designed to digitize the process of leasing a car, eliminating paperwork and done entirely via a mobile device
American Express, along with Indian conglomerate Tata, invested $12 million in Abra, which developed an app it said allows money to be exchanged between phones, as well as enabling merchants to accept digital cash. On the back end, Abra creates an index which maps phone numbers to public addresses on the bitcoin blockchain.
MasterCard was one of a number of companies backing Barry Silbert startup Digital Currency Group. The firm's purpose is to invest in bitcoin and bitcoin related companies, and it also operates a bitcoin OTC trading firm.
But what is driving the increasing embrace of bitcoin? It is likely just curiosity and a fear of being left behind, said Gil Luria, a managing director at Wedbush Securities. He said the level of interest in the bitcoin blockchain is definitely on the rise in the financial services industry, but varies by organization.
"A lot of the large financial organizations are indeed dipping their toes in water; they are hearing a lot about the technology and they want to start exploring it in the lab and see if they can develop products around it," he said. "Then there are some others going a bit further that are genuinely committed to making this technology part of their future product offering."
As an example, he cites NASDAQ, which this week announced the first clients for a service called LINQ, a platform
that enables private companies to trade their shares using the bitcoin-powering technology.
NASDAQ bills LINQ as a "private blockchain," but Luria said the distinction is arbitrary.
"At the grassroots level these are related, and the bitcoin blockchain is just the most advanced and proven application of this technology," he added.
American Express said its primary interest in investing in Abra was to get a better understanding of blockchain technology and explore its potential.
"As we watch the digital currency industry develop, blockchain technology is playing an important role and you can imagine a number of potential use cases for this technology in financial services across both b2c and b2b transactions — from international money transfers to stored value," said Leah Gerstner, vice president of public affairs for the card network. "This is our first investment in a digital currency company."
Ron Hirson, head of product for DocuSign, said his company in its partnership with Visa had a keen desire to learn more about what would be possible with the blockchain.
"For DocuSign, with the work we do on data validation, integration, and different kinds of documents, there's an interest for us to explore further," Hirson said. "We didn't just do this for fun."
MasterCard declined to comment on its motives behind having a stake in Digital Currency Group, but Silbert in a statement issued this week announcing the investment stated that, "I wanted to work with firms who have a long-term perspective, and were willing to explore with us and invest not only money, but real organizational and intellectual capital into building businesses and partnerships that will enable us to unleash value in new, unprecedented ways."
Still, despite the recent spate of deals involving established financial firms and bitcoin companies, don't expect the industry to fully embrace the cryptocurrency and its technology with open arms just yet, cautions Charley Cooper, a managing director at R3CEV.
"With bitcoin and the blockchain, generally their real interest is looking at how it works, not yet necessarily how to leverage it for a real use case," he said. "It's about understanding how bitcoin was developed, then taking a lot of that and make it work in the context of a regulated financial institution."