Bitcoin and the blockchain protocol have achieved a system that enables the exchange of value between two parties unknown to each other in a swift and effective way, without the need for intermediaries. Despite its immaturity and the many challenges it involves, the financial industry has set its sights on this technology, that can offer a great opportunity for generating new banking services that are more agile, less expensive and more favorable for its customers.
Macarena Peña, Business Development manager of BBVA’s New Digital Businesses area, is responsible for seeking the opportunities related to blockchain. Peña explains in this interview how this technology works and the challenges it poses for the banking sector. In her opinion, there are only two things preventing banks from beginning to offer Bitcoin services: regulation and real customer demand.
– What is the difference between Blockchain and Bitcoin?
In the original papers of Satoshi Nakamoto, Bitcoin is defined as the application that enables “pure exchange of electronic money between the parties”, while blockchain is the technical description that explains the operation of the back-end of the application’s database.
Strictly speaking, the term blockchain refers to the unchanging ledger that contains the full history of all the transactions executed in the network with a timestamp. Any person at any time can access and check this ledger, knowing that the information it contains is updated and consistent with the other nodes in the network, despite the fact that it is a decentralized network.
– Why do banks like blockchain better than Bitcoin?
The purpose of Bitcoin was to revolutionize the exchange of value between users without the need for using financial intermediaries or pubic institutions to verify the validity of the transaction and without having to use legal tender. This is how bitcoin is used, as a unit of exchange. And in order to be able to send bitcoins, first you need to have bitcoins or exchange legal tender for bitcoins.
This explains the emergence of specific companies specializing in facilitating currency exchange, which in many cases are the same ones that provide you with the wallet to store them.
But not all these companies are fulfilling the legal requirements of customer knowledge and money laundering prevention. In some cases they are not even entities subject to compliance with those requirements.
Banks and other financial institutions are strictly regulated to prevent those practices from happening, and may even be fined if any of those transactions is executed through us. The European Banking Authority published a series of warnings in this regard for users and financial institutions.
If there were a Bitcoin regulation requiring users and participants to comply with current regulations, and real customer demand, banks would have no trouble in providing the Bitcoin service to our customers.
The transaction figures continue to increase, but its use is not widespread among users, who still see more barriers and difficulties than benefits.
– Do you think that Bitcoin is being used for illegal purposes recurrently?
Bitcoin’s total volume is very small compared with other payment mechanisms (cards, transfers, cash, etc.). It is true that it enables transactions to be carried out with pseudo-anonymity and there have been cases where bitcoins were being used for illegal purposes.
However, because of the full public registration of the transactions, it would be easier for the authorities to trace the origin and destination of funds with Bitcoin than using more traditional schemes. In fact, there are already some Big Data startups that are focused on this point and are carrying out ongoing monitoring with amazing results.
In my opinion, although the Bitcoin network could allow these offenses, it is not an appropriate way for carrying out recurrent or mass illegal operations.
– What does the distributed ledger technology mean for the banking business?
The Bank for International Settlements recently published a study on the impact of blockchain and the distributed ledgers on the financial industry and concluded that it would be possible to reduce the intermediary role played by banks, clearing houses and central banks.
This technology can eliminate the need for trust between the parties and provide control over double costs. This means that part of the value chain of many current banking processes and services, where we act as mere intermediaries, could disappear. But at the same time, other new products and applications would emerge that we would have to consider to serve our customers.
This technology is at the same time and opportunity and a threat for banks, depending on the strategy they follow and their degree of knowledge for taking advantage of the windows of opportunity.
In this regard, BBVA has been working for some time to be one of the most innovative banks, developing pilots and proofs of concept, and approaching the ecosystem through investments (such as Coinbase), agreements (DLG), talks (Digital Currency Summit 2015) or contests (Open Talent or Innova Challenge).
– Can you explain with examples what banks could achieve if they could use blockchain in their businesses?
One of the first most immediate impacts would be reduced costs. Today, each bank has a series of servers deployed where the information they contain is duplicated with that of other many banks and institutions. To update the information contained in a database of one bank with that of another, we use messaging processes. If many of the banks used a shared ledger with that duplicate information, significant savings would be achieved, as well as agility in some of the processes that now require validation.
If some bodies and supervisors were involved in the execution of some nodes, it would even be possible to improve the reporting controls and processes with them, reducing some of the back-office tasks.
Supply could also be improved. Many of today’s processes could be automated and expedited. There would be much more transparency and granularity in terms of customer needs. New products and services that are now unfeasible due to their complexity could be offered. In this regard, applications are now being explored within the shared ledgers, such as smart contracts, event-oriented code programs that could process information and receive, store and send securities.
– What barriers are holding back its implementation in financial services?
First, although this technology is revolutionary and promising, it is very immature. Banks need to guarantee the security, robustness and scalability of our customers’ operations.
There is no doubt that it will evolve a great deal in 2016 thanks to the interest shown by technology giants like Cisco, Intel, Microsoft and IBM in building this sound infrastructure.
Second, regulation. There is still no legal framework protecting the rights of users of these technologies or overseeing the obligations of the institutions that use them. So far, there has only been some regulation in the United States and very focused on Bitcoin. And no distinction is being made among different configurations of the ledger.
– What does being in DLG with R3 mean?
DLG is an initiative among banks for coordinating efforts in the research and development of the distributed ledgers in our industry. The fact that it has over 40 global banks sitting at the same table shows its potential. If we want to make the most of this technology to change some of our processes, the network effect needs to be developed. It makes little sense having a fax machine for sending information if nobody else is connected to it. And to be able to communicate, we have to define those rules that make interoperability easier.
R3 has hired the best professionals in the industry and is in continuous contact with other large participants for driving this project and making it a reality. There should be actions and projects, and not only conversations.
– In addition to the banking business, in what other areas could this technology be applied?
This technology could be used for registering or exchanging and type of asset (financial, tangible or intangible). If could replace many document-based registers. It could also replace the function of some notaries with the function of validating the date and electronic signature of the participants.
It also has applications for managing intellectual property. Since this technology distributes a public and private key system, the rights could be distributed in a much more controlled and secure way, seeing who accesses, consumes or distributes a book, a song, etc.
We are also seeing applications for registering jewels or art, avoiding theft and improving insurance management.
The evolution of smart contracts could also be an enabler for the Internet of Things.
– Do you think that blockchain is here to stay or will it be a passing fad?
It is clear that Bitcoin arrived first, followed by cryptocurrencies, then blockchain and now the distributed ledgers. Each concept has attracted a great deal of media interest and has had its time.
Although the distributed ledgers may only be an advanced version of distributed databases, at least they have acted as a revulsive that has brought a new way of thinking in mini-industry processes, P2P interactions with no barriers and building of smart contracts.
And it has much potential for being the seed of what we will certainly witness in the coming years, when the technology is at a more advanced stage. In 2016 and beyond we will be witnessing more robustness and soundness in the industry.