Will bitcoin provide banks with their 'Kodak Moment'?

Will bitcoin provide banks with their 'Kodak Moment'?

The world's banks are facing a 'Kodak Moment' if they continue to dismiss the virtual currency bitcoin as just the opening act for more revolutionary blockchain-based innovation, says Max Tannahill, a business change and implementation manager at ANZ

It has been hailed as the internet of money, criticised for fuelling an illicit trade in drugs and weapons, allegedly aided terrorism, been touted as a libertarian dream and as a way of flouting capital controls (although actual use cases in China, Greece and Cyprus are hardly conclusive).

Predictions on Bitcoin's future have been as varied and optimistic as a reserve currency to rival the US Dollar, a threat to the Debit and Credit Card business models, a disruptor of remittance corridors (despite the challenges of the “last mile”) as well as the notarisation and document registration industries.

Yet the currency has also been dismissed and written off so many times there is an ironic collection dedicated to the subject and, lately, particularly amongst the financial industry as merely an interesting app on the far more interesting piece of technology: the “blockchain”.

Of all the conclusions to draw about Bitcoin, the last one is the most dangerous for banks. Whilst the debate over the merits of a ledger (open to anyone to contribute to as opposed to only trusted participants) is fascinating, even if banks are successful in developing some type of utility settlement coin as a way of improving reconciliation between counterparties they must also integrate with Bitcoin or risk only focussing on building another SWIFT or DTCC-like network.

Bankers can dismiss Bitcoin as just the opening act for the blockchain (which itself has been described as just a fancy kind of database) but this trivialises what the protocol has demonstrated: secure and irrevocable wealth transfer in an environment without institutions. This has been achieved by rewarding participants with an token utilising a chain of hash-based proof of work.

Source: www.bitsonblocks.net

This is unprecedented. Additionally, Bitcoin remains the world's most robust (the increased immutability makes it more resistant to attack) and ubiquitous distributed ledger. As a permissionless peer-to-peer network, even if it doesn't become the de facto form of payment in the future it will remain a vital means of transacting due to its unique offering.

Most retail banks could do better when it comes to offering their customers cost effective ways of handling micropayments, monetising content or donating. Poor foreign-exchange spreads, long accepted grudgingly by customers are already being disrupted but Bitcoin can be used as the intermediate currency where these services have not yet launched.

In addition to these more conventional use cases are the potential of programmable transactions, where, for example, a payment could unlock a door to a hotel room. Bitcoin may offer the realisation of the internet-specific method of payments envisaged in the original application protocol (the 402 code) for the World Wide Web, a need that will only increase as the world becomes increasingly connected.

There is no way correspondent banking can handle this for users in a manner comparably efficient or secure.

A certain level

More tellingly, Bitcoin 'wallets' (better conceptualised as keychains offering users control over their digital tokens) have more sophisticated than original designed.

Banks now offer digital representations of operational structures which have existed for years: merely a record of abstract balances and transactions, rendered in a single fiat currency which requires the customer to make manual sweeps from current to savings to stock accounts. Third-party hosted wallets are providing users the ability to receive, spend and hold money in a combination of currencies or even, be their own bank.

Even the trust created by government-guaranteed deposits could be eroded. After all, who needs a lender of last resort when you can publicly and transparently prove you are solvent? Will taxpayers continue to accept a large transfer of wealth to the financial sector which does not adequately compensate them for the risk undertaken?

What has been the response to this threat so far? For the average retail customer, the mobile revolution has simply ushered in the ability to manage their account on a palm sized device. The security process in banking apps are often onerous for the average user.

Two-factor authentication utilises SMS at best or, typically, separate physical secure tokens as opposed to the authentication methods used by Bitcoin exchanges and cloud services which work seamlessly with a range of tablets and phones.

Mobile peer-to-peer payment functionality is stubbornly kept walled off and arguably offers less functionality than electronic bank transfers initiated on a browser. A user of Dash or PayLah in Singapore is only able to pay other individuals by their phone number where they also have an account at Standard Chartered and DBS respectively.

The Faster Payments, FAST and SEPA networks are not free to operate and they will need to open up to newer players. As for the retail banking attitude towards Bitcoin, aside from some investments in related technology, the policy has been to close accounts citing regulatory concerns. This need not be the case.


Integrating consumer accounts with the ability to send and receive Bitcoin would immediately deliver benefits to users they will only seek out themselves when the technology becomes more widespread.

Moreover, retail banks are fortunate they are already sitting on what the tech sector values so much: a user base. With their experience in trading technology as well as in AML, KYC and CFT checks, financial institutions are far better positioned to become the trusted intermediaries for exchanging digital assets to Government issued currency than the new upstarts.

Bitcoin was described by Satoshi Nakamoto as 'digital cash' and, for this purpose, banks would be wise to treat cryptocurrency in exactly the same way as physical cash deposits and receipts.

Adopting Bitcoin would also counter the threat of Apple Pay, Android Pay and payments in Facebook Messenger. As an open protocol, Bitcoin would offer users far more flexibility in how they would transact than the closed ecosystems these services will inevitably bring.

To avoid their Kodak moment, retail banks should take up their natural role of a 'trusted gateway' before it is too late.

This article first appeared in ANZ BlueNotes. The bank states: the views and opinions are those of the author and may not necessarily state or reflect those of ANZ.

Comments: (7)

David Birch
David Birch - Tomorrow's Transactions - London 16 March, 2016, 09:29Be the first to give this comment the thumbs up 0 likes

"an environment without institutions"




A Finextra member
A Finextra member 16 March, 2016, 09:46Be the first to give this comment the thumbs up 0 likes

Whilst you can use an Exchange to purchase and transact bitcoin, there is no requirement to. The fact of the matter is that an electronic payment can be made by one individual to another and it is validated by a network of computers. There is no central authority and the network has been run in a distributed manner without a single breach in the security of the protocol.

I would also add that with the inclusion of multi-sig technology into wallets, funds can now be kept at an Exchange with far greater security than before. The industry has moved a long way since Mt. Gox.

Jeremy Light
Jeremy Light - pingNpay - London 16 March, 2016, 10:34Be the first to give this comment the thumbs up 0 likes

There is much merit to this view. I have long held the opinion that banks should have a role in issuing (KYC'd) cryptocurrency wallets, in effect acting as custodians of private keys for distributed ledger transactions, and developing services round them. Clearer regulation (AML and sanctions) is still needed for banks to go anywhere near Bitcoin or other alt-coins, but I predict they will come round to it in time - perhaps later this year, perhaps next.

The Bank of England  also warns that retail banks may not have a role in deposit-taking if a central bank were to issue a digital currency on a distributed ledger  https://www.finextra.com/news/fullstory.aspx?newsitemid=28549&topic=payments. If you doubt this, get yourself a bitcoin or an ether wallet and send a payment to another wallet - you can instantly see how easy and quick it is, and how there are no intermediaries or clearing mechanisms. Whether the future of money is bitcoins, ethers, sterling coins, dollar coins or whatever, account-to-account direct settlement is the future of payments.

David Birch
David Birch - Tomorrow's Transactions - London 16 March, 2016, 10:51Be the first to give this comment the thumbs up 0 likes

Well, I wouldn't call it "quick" Jeremy, but your point is well taken. If a central bank issues digital currency, then at low interests rates or times of risk, banks will be starved of deposit. Come and listen to the Postive Money view on this at our Forum next month.

P.S. How does multi-sig help to get money back from the bad guys if the concert tickets never show up, for example?

A Finextra member
A Finextra member 16 March, 2016, 11:05Be the first to give this comment the thumbs up 0 likes

Multisig has a range of applications. 

It can be used as an escrow so a trusted arbitrator can have a key to a wallet which, on its own, doesn’t enable them to spend the balance. From an exchange perspective, it can be used to ensure that customer balances can be only be spent by the exchange and a third party or the exchange and a customer. Another application is as a form of multi factor authentication. You could set your wallet to only make payments with keys stored on more than one device. 

If you want to try this out first-hand, I would advise you to download the Copay wallet which has this shared wallet functionality and is very user friendly. It’s free, open source and available on almost every platform.


A Finextra member
A Finextra member 17 March, 2016, 09:01Be the first to give this comment the thumbs up 0 likes

"account-to-account direct settlement is the future of payments."

Opening digital wallets and account to account settlement is very easy and instantaneous nowadays.. Believe account to account settlement without any bank / financial institution involvement is already present and growing by the day.


Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 17 March, 2016, 16:05Be the first to give this comment the thumbs up 0 likes

"Kodak Reports 2015 Q4 and Year-End Financial Results, Exceeding Earnings Goal for the Year" (https://twitter.com/Kodak/status/709836872135151617). I also noticed in the credits that the recent Hollywood blockbuster The Big Short was shot on Kodak film. Just as A Finextra Member has pointed out that "The industry has moved a long way since Mt. Gox.", Kodak has also moved a long way since Kodak moment.