Digital currency: What does the future hold?




Emerging technologies are constantly changing the way business is being done in the financial world. Even the currency most people have become accustomed to is changing.

Take blockchain technology, the underlying architecture used for bitcoin, a decentralized digital currency that works like cash, except it’s not. Blockchain is an innovative shared database that records and maintains transactions between parties for digital currencies like bitcoin.

Think of bitcoin as a “proof of concept” that shows the viability of blockchain architecture, said Robert Morgan, vice president of emerging technologies at the American Bankers Association.

What makes blockchain technology so attractive is it facilitates fast, efficient financial transactions, according to Morgan. Blockchain uses digital ledger technology, or shared ledger, which speeds up processing time while creating greater transparency among parties involved in banking transactions, he said.

“Rather than settling transactions which are traditionally done daily, it lets everyone be in the same ledger and can settle the transaction in real time,” Morgan said.

“The technology also creates an unchangeable record of transactions, ensuring security,” he added.

Investopia.com, a large financial education platform, likens blockchain to a banking transaction history, while bitcoins are chronological transactions that become part of the blockchain history.

Blockchain investment

Over the past three years, $1.4 billion was invested in blockchain technology to help unravel its usefulness in the financial services industry, according to a 2016 report published by the World Economic Forum.

Plenty of banks are investing in blockchain technology and many large banks participate in partnership consortiums like R3 CEV, a blockchain consortium made up of more than 70 financial institutions. But riding the blockchain wave comes with plenty of uncertainty. An article in AmericanBanker.com recently noted that several big banks pulled out of R3 CEV, and concerns remain about decentralized currencies.

However, backers of blockchain technology invest in it because they see potential to drive efficiencies and reduce costs. Regardless of the cost and the complex nature to develop blockchain and cryptocurrency technology, banks simply cannot afford to ignore it, according to David Sofge, financial services attorney with Holland & Knight in Fort Lauderdale, Fla.

“There’s a legitimate concern for banks that if they don’t keep up someone will take this business from them,” Sofge said. “Part of the competition comes from outside the banking sector, it comes from technology companies.”

When it comes to developing fledgling technologies that support cryptocurrency, Sofge said there is an uneven playing field between banks and fintech companies.

“These [tech] companies don’t have the same regulatory obligations and constraints banks have,” he said. “Banks are enormously regulated, it’s an enormous burden and it adds a lot of cost [for banks].”

Industry concerns

Even if cryptocurrency drives efficiencies, many in the banking community remain uneasy about the concept of a decentralized digital currency, according to Morgan.

“These [digital] currencies are outside of government control, there isn’t total transparency or understanding in how they work and what the security level is,” Morgan said.

That’s not to say a decentralized cryptocurrency can’t work, Morgan said, pointing to the success of bitcoin as an example.

“When you’re able to take that technology that has worked, like in a use case study of bitcoin, and apply it to the traditional [banking] system that has the right regulation and oversight to make sure that it is secure, then you’ll get the win-win,” he said.

Regulatory control

Should cryptocurrency continue to gain ground in the coming years, it’s difficult to predict how the legal and regulatory landscape might change.

“Implementing new financial infrastructure will require changes to existing regulations, standards of practice, and the creation of new legal and liability frameworks,” according to a report titled The Future of Financial Infrastructure published in August 2016 by the World Economic Forum.

Creating the right legal frameworks for digital currency “will be a long and complicated process,” Sofge said. That’s because the technology is still evolving and both the technology and legal framework will need to be developed as a “parallel process,” he said.

While certain regulatory changes are likely to happen, Morgan said customers should be able to expect the same protections they’ve always had whether they use new or old payment systems.

“What you don’t want is to put in specific rules to technologies that mandate specific technologies or uses in ways that that will limit them down the road,” Morgan said.

“So, when banks are integrating new technologies, like blockchain, they’re doing it in a way that makes sure customers stay protected,” he added.

On the flip side, cryptocurrency brings plenty of questions to the world of banking. Because the technology is changing so rapidly, it’s the kind of race that will require bankers to pace themselves as they make strategic decisions.

“There’s no time for the regulators and legal system to take a relaxed and methodical view, as a matter of public demand,” Sofge said. “Regulators are trying not to get left behind as the technology develops.”

Freelance writer Elise Oberliesen contributed to the writing and research of this article.


About the author

John Roszkowski

Finance Editor John Roszkowski develops and edits content for OnCourse Learning’s financial services blog, which covers industry news and trends in mortgage, banking, compliance, credit unions, gaming and nonbank financial services. He has more than 25 years of writing and editing experience, having previously worked for weekly and daily newspapers.

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