Those fees can add up, especially for US companies engaged in significant cross-border business, since correspondent banks on both sides of the transaction may impose fees. In addition, currency exchange rates can be as high as 3% or 4%, and such transfers can take two or three days to settle – a seeming anachronism in the digital age when emails zip around the world in split seconds.
Cross River Bank in Teaneck, New Jersey, is taking steps to bypass the correspondent-bank middlemen and what the six-year-old bank’s chief executive (CEO), Gilles Gade, calls their “quasi monopoly.” The bank is preparing an imminent regulatory filing to use one of the digital protocols emerging alongside the so-called crypto currencies. This is in order to offer a cross border payment service that should drop fees precipitously, and speed up settlement to seconds rather than days. Market makers competing in the Ripple network should drop exchange rates. “It’s going to offer a much needed option to businesses to gain access to a more cost-efficient and faster way to transfer money,” says Gade.
Cross River will use Ripple, which offers its own digital currency and settlement protocol. Ripple has pursued a different conceptual path from bitcoin, but they share a common goal with literally hundreds of emerging initiatives – to build vast digital networks, enabling participants to transact more efficiently and safely than existing systems.
Most of the initiatives use bitcoin-like protocols or have developed their own cryptocurrencies, so called because they employ cryptography to secure the transactions. Like Ripple, however, use of the currencies may be optional. In fact, the initiatives’ greatest contribution is likely finding new ways to translate different forms of value into a digital environment that is highly secure, auditable and efficient – or what Gartner analyst David Furlonger calls the “programmable economy.” Furlonger says the digital currencies and protocols are essentially lines of code comprising ones and zeros, suggesting virtually anything can be coded similarly.
“That means you can distribute that representation of value anywhere in the world in a decentralised fashion, unlike US dollars [USD] that are controlled by the Federal Reserve,” Furlonger adds. “That’s fundamentally game changing.”
The programmable economy is still in its very early stages, with many initiatives still little more than groups of believers exploring possibilities while others have carved out more defined goals. Counterparty, an example of the latter, is incrementally building on the functionality of the bitcoin network referred to as the block chain, which is a transaction database shared by all participants in a system based on the digital currency’s protocol. Participants’ copies of bitcoin’s – or another cryptocurrency’s – block chain contain every transaction ever executed in the currency, providing the value ascribed to that currency at a specific point in time.
Counterparty takes advantage of that immutable transaction chain, which is literally confirmed by the thousands of digital ledgers currently in use by bitcoin users. It enables users to create tokens that are tied to the bitcoin network, but which represent other forms of value besides the bitcoin currency. Adam Krellenstein, one of Counterparty’s founders, says the tokens enable more complicated peer-to-peer (P2P) transactions, such as derivative trades and smart contacts, which self-enforce contractual terms.
US online retailer Overstock.com, for example, announced in early October that it is building a digital stock exchange http://www.coindesk.com/overstock-hires-counterparty-developers-build-cryptosecurity-stock-exchange/ on the Counterparty platform that will enable it to sell shares to the public. Counterparty tokens will represent actual shares of Overstock.com – unlike traditional stock that legally represents ownership, but in fact are investors’ contractual rights against the company holding the stock on their behalf. “There’s no re-hypothecation, no [Depository Trust & Clearing Corp.] settlement,” says Krellenstein “It’s just the investor owning shares in the company itself.”
Extensible Markup Language Procedure Call (XPC) tokens can be backed by virtually any asset and because both sides of the transaction must meet network protocol for it to occur it is, necessarily, secure. Of course, the party backing token could fail to meet its obligations, which is why Ripple has added an authorisation level that requires participants to perform due diligence on and approve other participants they want to transact with. “That’s why it’s so important to have a bank on each side of the transaction, because banks are regulated more than money transfer companies and other nonbank financial companies,” says Gade.
Ripple has no ambitions of replacing SWIFT, automated clearing house (ACH) or other money transfer systems used by corporates. However, instead of waiting overnight or longer for the funds to transfer and the transaction to settle, the protocol allows for nearly immediate settlement or funds transfer. “In the context of the US payment system, Ripple doesn’t replace the system, like SWIFT or ACH,” says Welly Sculley, director of business development at Ripple Labs, which contributes code to and promotes the open-source Ripple payment protocol. “But it can either enhance or augment the settlement infrastructure technology these systems use to actually transfer value from one bank to another.”
Benefits of the Block Chain
Many of the so-called bitcoin 2.0 initiatives have little to do with fund transfers and instead take advantage of the bitcoin protocol – or their own – and the corresponding network of user nodes, which essentially act as immutable ledgers that can’t be changed. “Once the history of bitcoin – or another cryptocurrency – is confirmed in a block it can’t be changed in the future,” says David Johnston. “Because it’s time-stamped, everybody knows certain events happened at certain times. That’s really very powerful.” Johnston founded the BitAngel Network, an angel investment group, soon after the first bitcoin conference in 2013. The event was sponsored by the Bitcoin Foundation, which aims to standardise and promote the digital currency. In March Johnston started DApps Fund, a venture capital firm that has invested US$7m worth of bitcoins in bitcoin 2.0 start ups – perhaps more appropriately called crypto 2.0 start ups – that are exploring a variety of uses.
Johnston joined members of the Factom team to co-author a recently published white paper, describing how to use the block chain to record large volumes of information without slowing block chain creation. “It’s giving people the ability to extend the security model of the bitcoin block chain to the rest of the data people want to store and make accessible,” Johnston says. He points to Bank of America’s recent US$17bn fine, essentially for losing track of the mortgages it originated, commenting “you could solve that business process by having a permanent way to store all those documents, taking a fingerprint of the document and connecting them to the block chain.”
The Deep Horizon oil spill in April 2010 was another system-of-record failure. BP failed to keep track of whether subcontractors were completing crucial tasks, resulting in the oil-platform disaster. Block chain technology could also be used to ensure veracity of supply chains, Johnston says, adding that several crypto 2.0 projects today are exploring that application to the pharmaceutical industry, where there have been instances of fraud along supply chains that resulted in corrupted medicines. “Block chain gives a company the ability to audit the business process in real time,” he adds.
Johnston points to Foodway, a fledgling project that aims to ensure the food supply chain isn’t tampered with and food comes from exactly from where the label says. It is building its platform on top of the Ethereum network, which is in the testing phase and plans to launch officially in Q1 of 2015. Ethereum is developing a similar open source, decentralised network, but it has chosen to develop its own chain technology to move beyond the currency function and allow users to build a variety of decentralised applications on the block chain.“We’re basically enabling anything to be put on the block chain that can be mathematically represented,” says Stephan Tual, Ethereum’s chief communications officer, adding that transactions on Ethereum occur within 10 seconds, instead of the 10 minutes for most bitcoin transactions.
Ven Gains Traction
One such start-up on the Ethereum network is Airlock, which aims to provide a universal locking mechanism using Ethereum’s highly secure decentralised block chain to avoid the peril of a hacker penetrating central data base and gaining entry to a home or car. Others, such as Project Eris and Cubespawn respectively, aim to make corporate governance more transparent and further automate industrial manufacturing.
In a major validation of crypto currency technology, IBM recently announced it was copying Ethereum’s code base. Tual says the technology giant is implementing Ethereum technology as a part of the Internet of Things – or the growing network of everyday objects that communicate with one another – and plans to demonstrate the technology at the Consumer Electronics Show in Las Vegas early in 2015.
Although the current rage is to apply cryptocurrencies and especially their protocols in completely new ways, Hub Culture has focused on developing and expanding the use of Ven, a digital currency backed by a mix of fiat currencies, commodities and carbon, bundled into a single unit, much like an exchange-traded fund (ETF). Unlike the newer cryptocurrency initiatives, the Ven social network is centralised and relies on algorithmic cryptography to maintain security, monitoring the central currency ledger. Its diversified structure, Ven is 50% less volatile than the average fiat currency, according to Stan Stalnaker, founding director of Hub Culture. “Companies can hold Ven on their balance sheets and reduce volatility while collecting the carbon benefit attached to it,” he says.
Hub Culture introduced Ven in 2007 as a system similar to airline miles reward schemes, where individuals or companies can buy Ven and redeem them for a wide range of goods offered in the network. Starting earlier this year, the digital currency began trading on the European financial trading platform LMAX Exchange, as well as Kraken, a US exchange for digital currencies.
Stalnaker says 30m Ven had traded up to the start of 2014, but by late this month that number had soared to 500m Ven changing hands. Most of the activity stemmed from high frequency trading over the exchanges, enabling banks and other institutions to hold Ven and take positions. Hub Culture is now working with partners to issue credit and debit cards denominated in Ven, allowing users to shop for goods and services in the Hub Culture network, at traditional retailers, or elsewhere in the cloud. “These cards will enable the first green transactions ever,” he adds.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.