By Jimmy Nguyen
Founding President, Bitcoin Association
Banks have long been wary of digital currencies and other assets, but they need not be. While it’s easy to understand why banks and Bitcoin have not always been perceived as an obvious combination, it’s time banks begin to embrace the host of new business opportunities being created by Bitcoin – at least with its original design living now as Bitcoin SV (BSV). Early digital currency influencers falsely portrayed Bitcoin as intended to undermine the banking system, but those cypherpunk voices failed to understand Bitcoin’s true purpose. Bitcoin was never meant to be anti-bank; it created an open time-stamped ledger system to prevent cheating and bring more honesty to the business world. With Bitcoin SV, that “Satoshi Vision” is finally being restored – and in an honest world of Bitcoin, there are many valuable business opportunities for banks.
Bitcoin’s Original Design for an Honest Ledger System
In 2008, the original Bitcoin white paper by Satoshi Nakamoto unveiled to the world the design for a revolutionary peer-to-peer electronic cash system. But more than just a digital currency, Bitcoin is also a network protocol; just like Internet protocol, it is the foundational rule set for an entire data network. In fact, Bitcoin transactions represent the fusion of data (“Bit”) with monetary value (“coin”). Payment and data transactions are recorded on a blockchain – a distributed ledger that is maintained by numerous nodes across a worldwide network, rather than by a single authority (such as a central or commercial bank). As described in the Satoshi white paper, the ledger is a distributed “timestamp server” that records transactions in chronological order; while confidential information can be encrypted, the ledger history is public, auditable and verifiable.
Rather than being anti-bank or anti-government, Bitcoin’s open timestamp ledger is exactly the type of system that financial institutions can use to incentivize more honesty in transactions. (Read the Bitcoin white paper and you’ll see it uses the word “honest” 15 times.) After years of technical debates in the digital currency community, Bitcoin SV is now massively scaling the blockchain to process greater data capacity, huge transaction volumes, at fast speed, with tiny transaction fees, and even enabling micropayments of fractions of a cent. This scale is necessary to support diverse use cases of Bitcoin’s data protocol by financial institutions and other enterprises. Bitcoin SV is also building a regulation-friendly ecosystem that promotes KYC, AML and other legal compliance, in order to bring Bitcoin out of the shadows and into the light for global adoption.
How Can Banks Use Bitcoin SV?
So what can banks do with a Bitcoin network that provides an honest timestamp ledger and massive scaling capacity that enables microtransactions? The answers are many.
- Consumer Payments. Banks can embrace BSV as the most efficient global digital currency in the world – enabling instantaneous domestic and cross-border payments that cost just tiny fractions of a cent to send. Banks can support Bitcoin wallets for their customers, merchants, and new digital payment services using BSV.
- With instant transactions and very low fees, Bitcoin SV’s timestamped ledger can act as the payment rail and settlement system to make international remittances faster and cheaper for customers. Centbee, a BSV wallet and payments company in South Africa, offers a Centbee Remit product using BSV process cross-border remittance for under $1 per transaction. Likewise, banks can use the Bitcoin SV blockchain to create (or use a third-party’s) more efficient remittance and overseas payment alternatives for their customers.
- Clearance and Settlement. It’s not just consumers who would like a more efficient cross-border money transfer system built on Bitcoin SV’s open ledger. Financial institutions and their enterprise customers can also benefit from a faster, lower-cost process for clearance and settlement. Greater efficiencies from such systems will be of obvious benefit to banks.
- Microfinancing and microloans. Blockchain technology can make it more economically feasible for banks to do microlending to SMEs, as well as unbanked merchants and consumers in developing areas. Bitcoin SV is especially well-suited to this use case given its speed, very low transaction fees, and smart contract capability. Microloans can be set up with smart contracts that automatically repay the lender with small portions of the lendee’s ongoing revenue – which speeds up repayment and reduces the lender’s collection costs.
- Tokenize real-world assets. The Bitcoin SV ecosystem supports the tokenization of real-world assets, and there are different token protocols available. For example, the Tokenized protocol for BSV is a regulation-friendly solution to tokenize many types of real-world assets – be they precious metals and commodities, or financial instruments such as stock, bonds, options, futures, asset and mortgage-backed securities, and collateralized debt obligations. The Bayesian Group, a set of fintech companies based in Toronto, Canada, is using the Bitcoin SV blockchain as the base ledger for a “Tokenized Everything” ecosystem to support easy trading of all digital assets and Open Finance. Banks can be at the forefront of asset tokenization for their customers and leverage new business models as a result.
The OCC Sends a Positive Custody Signal to Banks
There are recent signs that banking and Bitcoin can in fact work together. In July 2020, the U.S. Office of the Comptroller of the Currency published a letter clarifying that federally chartered banks and savings associations in the U.S. have authority to provide cryptocurrency custody services for customers. While some media observers covered this as a big development, in fact, the OCC merely clarified existing policy that national and state banks and thrifts can provide custody services for any range of physical and electronic assets, and that now includes digital assets. The OCC found that “holding unique cryptographic keys associated with cryptocurrency, is a modern form of traditional bank activities related to custody services.” Although this is not groundbreaking news, it is a positive cultural shift for a key U.S. regulator to make banks feel comfortable to provide services involving digital currencies.
More importantly, the OCC observed that in providing custody services for digital currencies, “banks can continue to fulfill the intermediation function they have historically played in providing payment, lending and deposit services.” This is a direct acknowledgement that banks can in fact play a role at different steps in the new digital asset transaction ecosystem; safekeeping is just one step in that process. In fact, the OCC letter analogized to a custodian of securities who often does more than just keep the assets safe – but also “typically settles trades, invests cash balances as directed, collects income, processes corporate actions, prices securities positions, and provides recordkeeping and reporting services.”
In the short term, we are unlikely to see a big wave of banks launching custody-only service for digital assets. But long term, the OCC’s reflection of growing industry open-mindedness should pave the way for banks to use custody as the base to deliver a more comprehensive set of digital asset services (such as the five categories listed above).
For banks, the new business use cases for blockchain technology are endless. But they are best achieved with Bitcoin’s vision for an honest transaction ledger that enhances (rather than undermines) banks and government, and with a blockchain that is massively scaling in the form of Bitcoin SV. Just as the Internet protocol ushered in a new era of digital communications and e-commerce, the Bitcoin protocol opens the door to new paradigms for custody, money transfer, asset tokenization, smart contracts, and financial products. This is a new world where banks can certainly benefit – if they just open their minds to the new business opportunities they can build with Bitcoin SV.
Jimmy Nguyen is Founding President of Bitcoin Association, the Switzerland-based global industry organization advances the Bitcoin SV digital currency and blockchain. A well- known advocate for Bitcoin, Jimmy was most recently the CEO of nChain – the global leader in research and development of enterprise-grade blockchain solutions. Previously, he had a 21-year career as an intellectual property and digital technology lawyer, and was a partner at three major U.S. law firms.
Editor’s note: An adapted version of this article was originally published by the Bank Administration Institute.