During almost two years of the coronavirus crisis, several existing shifts within financial services have accelerated - most crucially, the use of online platforms for carrying out previously in-person transactions, and people going a step further and opening digital 'wallets' to buy and sell cryptocurrencies.
The blockchain technology on which the latter is based on is nothing new - the main currency Bitcoin launched in 2009 - but during the various periods of lockdown, many began share trading via easy-to-use mobile apps and dabbling in the increasingly social media-hyped world of 'crypto'.
While valuations have charted a very volatile course, the value of Bitcoin has risen from around $700 in 2016 to more than $56,000 per coin last year.
While the market is dominated by several fast-growing fintech facilitators, traditional financial firms have taken notice, with J.P. Morgan for instance creating its own digital currency around this time last year.
This rapid rise has not come without warnings from the centralised institutions that the technology seeks to usurp. Both the Bank of England and the Financial Conduct Authority (FCA) have expressed concern around the lack of market oversight and recourse if things go wrong.
FCA figures last June suggested that 2.3 million UK adults now hold crypto assets - up from 1.9 million last year - while 78% have now heard of them. Attitudes also appear to be changing, with 38% of crypto users regarding them as a gamble - down from 47% last year - while increasing numbers see them as either a complement or alternative to mainstream investments.
At the time, the FCA’s executive director for consumers and competition Sheldon Mills said: "The market has continued to grow, and some investors have benefitted as prices have risen, however it is important for customers to understand that because these products are largely unregulated that if something goes wrong they are unlikely to have access to the FSCS or the Financial Ombudsman Service.
"If consumers invest in these types of products, they should be prepared to lose all their money."
Earlier this month, the UK Government announced that cryptocurrency adverts will have to meet the same standards as other financial promotions, such as insurance, to help protect people from potentially misleading claims.
Under the plans, the promotion of cryptoassets will come under FCA rules, in line with other financial promotions.
The FCA has also now registered 30 crypto businesses - including Edinburgh-based crypto payment service Zumo - with many more trying to get the official stamp of approval.
Zumo's own research found that many younger investors feel let down by the traditional financial system, with 51% of those aged 25 to 34 and 46% of those aged 35 to 44 agreeing that the current banking and financial system does not deliver good value.
Richard Crook, founder and director at fintech software firm LAB577 and the former head of emerging technology at the Royal Bank of Scotland - who led its blockchain strategy from 2014 to 2018 - suggested that the convergence of mainstream finance and what was previously considered the 'Wild West' of crypto is happening at pace.
“Over time you will not be able to see the difference between an institution that grew up in the crypto space, such as Coinbase or Kraken, and those that grew up in the financial services space, such as RBS or the Bank of Scotland.”
Crook and his team left RBS at the end of 2018 and he went on to found LAB577, building its own digital asset shared ledger (DASL).
He commented: “Bitcoin has captured the imagination and proved you can run a currency in a decentralised fashion and the technology underneath is capable of supporting value and that is the key innovation - that is the first time in history that a digital asset has retained value.
“The fact it is holding its value in the market shows there is trust in the underlying technology, that is important from a digital currency perspective and you are watching the central banks take interest.”
Indeed, the UK Treasury and Bank of England have been exploring the creation of a UK Central Bank Digital Currency (CBDC), which would potentially exist alongside cash and bank deposits. An update in November explained that a consultation to take place during 2022 will consider the design and technology behind the next development phase of the CBDC plan.
British banks are keeping a close eye on such developments, while spending a lot of time, energy and R&D budget on keeping up with the trend.
While he no longer speaks on behalf of RBS, Crook explained his previous role within the emerging technology team was partly to avoid the bank being “hoodwinked” by vendors, staying ahead of the fintechs and “independently assessing the technologies".
RBS' blockchain work started in late 2014, when his team partnered with cryptocurrency exchange Ripple to investigate different payment technology systems. His team brought five Irish banks together and created a distributed clearing house mechanism, which then led to RBS' pioneering work with 40 other financial institutions in developing R3’s Corda distributed ledger network.
Crook explained that Corda helped solve the key problem of blockchain's inherent anonymity, versus the transparency required by financial regulators, as crucially, all parties on the network are known to one another.
“The limitation of transparency is the greatest strength behind Ethereum and Bitcoin, but is also its greatest weakness when you apply it to the financial sector.”
Meanwhile, just this month, NatWest launched a new digital team to expand the bank’s use of blockchain technology, within its capital markets business.
Chris Agathangelou was appointed head of digital capital markets and will lead the new division, which plans to use distributed ledger technology to deliver credit and rates products to investors and issuers through digital channels and currencies.
While Crook predicts a convergence within the wider sector, there also appears to be a divergence, between those crypto-focused fintech firms which are offering their services up for stricter regulation, and those still fundamentally opposed to submitting to exactly the scrutiny many believe crypto was developed to avoid.
In October, the deputy governor of the Bank of England warned that digital currencies could trigger a financial meltdown, unless governments made moves for tougher regulation.
Sir John Cunliffe said there was danger financial markets could be rocked in a few years, comparing the sudden growth of digital currencies to the spiralling value of US sub-prime mortgages before the 2008 financial crisis.
But, it has not deterred officials from the Bank of England, which is among the 90 central banks exploring the introduction of digital currencies. Recently, a House of Lords committee warned that creating an official digital currency in the UK could pose “significant risks” to banks.
It said that the introduction of CBDC “would have far-reaching consequences for households, businesses and the monetary system”.
Paul Roach, co-founder and chief product officer at Zumo, is firmly on one side of the argument, stating the importance of assets being managed by regulated businesses to avoid scams.
However, he also argued that the blockchain was safer than traditional systems, as it created more transparency and allowed security officials to track stolen or laundered money more easily than cash.
“What we have to remember about this industry is that these assets are incredibly young - we are really 12 years into a brand new asset class that is seen as very disruptive to a very established system.
“From our point of view, regulation is coming and it’s a good thing, as it will help legitimise the industry from the retail point of view, so consumers can have confidence they can hold these assets as they would open a new bank account."
Roach also agreed with Crook regarding the mainstreaming of digital currencies. “We are seeing it already - crypto asset classes are being traded alongside traditional financial asset classes and instruments, with the lines becoming increasingly blurred.
“Again that will continue through regulation, because these types of institutional investors won't be involved with this unless they can be sure products can be held for the long term.”
Luke Bartholomew, senior monetary economist at abrdn, said that while the group was looking into using digital currencies to potentially improve efficiency, it would not be “actively investing” in Bitcoin or other products due to “profound” difficulties in valuing them, along with the regulatory flux at the moment.
He pointed to the US Securities Exchange Commission (SEC) also cracking down on the industry, which meant the value of the digital currencies might be “washing down”.
Bartholomew also noted environmental concerns around the energy-intensive 'mining' of coins, which is achieved by running huge banks of computer servers to verify new transactions, which don't fit with abrdn's new net zero pledges.
“I think there is some sense in which the technology itself could be disruptive, I certainly have colleagues in equity investment who are looking at companies that might benefit from that, so there is an indirect interest, but we're certainly not investing directly into cryptocurrencies,” he stated, noting that it's important to distinguish between Bitcoin and the underlying blockchain technology, which is used in many different applications.
“One of the reasons we are not touching it is the difficulty in fully understanding what drives price dynamics.”
Bartholomew remains sceptical as to whether any major financial institutions will go all-in one crypto, but did speculate on a potential future for CBDCs, which could lead to a break up of the existing banking system, separating credit creation and deposits from the payment side of things.
“What would mean is that essentially the banking system looks a lot like mutual funds and private equity firms and a lot less like banks - it’s quite a radical transformation of what we think banks should do - but it would take a very long time to come about.”
This could lead to a safer banking system, but in the short term would be significantly “destabilising”.
Roach sounded a more positive note, countering that CBDCs and crypto regulation could be areas in which the UK could be world leaders.
“I’m a firm believer that the UK should be a leader in crypto asset regulation development. I think that with different crypto assets if there was a UK based government token there is no reason a UK based stable based coin can’t be round now.
“The UK at the moment is in a unique moment, we can set regulations that can help businesses grow in a regulated environment and being at the forefront of that is going to be really important over the next decade.”
Scotland even now has its own cryptocurrency with the Scotcoin Project, that was initially conceived as a more efficient method of fund transfer between small to medium-sized enterprises (SMEs) and their customers, but has now grown into a globally-tradable coin with smart-contract capability.
Temple Melville, chief executive of the project, argued that crypto is a “great store of value” and believes eventually banks will start to charge people for holding their money, due to the “inconceivable” amount of money being printed that will lead to a “serious inflation”.
He stated: “You don’t have that with cryptocurrencies, you can keep them effectively for free forever if you don’t move them around - in fact cryptocurrencies are largely deflationary, rather than inflationary.”
Currently, Scotcoin is a charity, doing things like giving tracksuits to homeless charity Emmaus, which it purchased with Scotcoin from a supplier that would have burnt or buried the clothes. The supplier has the option to sell the ScotCoin or keep them and re-distribute.
Melville said: “I personally don’t think cryptocurrency will overtake fiat currency, they will exist side by side for a very long time.
“Banks are aware of cryptocurrency, but they love the blockchain, as it allows them to do things much cheaper than their existing legacy systems.”
Nicola Anderson, chief executive at FinTech Scotland, concluded that the number of new fintech SMEs building propositions in this field is a sign of the emerging market, while she predicts that many of these will opt to work in collaboration with the incumbent institutions, augmenting traditional offerings, while enabling more transparency and security.
“We anticipate more innovation in digital currencies, including stablecoins and crypto, and more propositions that enable new investments and new ways to complete payments or value exchange.
“In our experience both fintech SME's and incumbent financial institutions want to see regulation that helps these new markets develop.”
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