The Finanser Interviews: Roberto Ferrari, General Manager of CheBanca! and Board Member of Mediobanca

Following our regular series of interviews, we turn this week to talk with Roberto Ferrari, the General Manager of CheBanca! and Board Member of Mediobanca.

Roberto Ferrari

The bank, based in Milan Italy (where I’m speaking at the MegaTrends conference in May) has been recognized on many occasions as an innovator from flagship futuristic branches to award-winning banking apps such as WOW!   What makes innovation in the Italian markets any different to most markets?  Roberto explains.

What does innovation mean at such an exciting historic moment?

Everyone is talking about innovation these days. The hardest thing is to manage the technology in order to provide new, simple solutions to clients. Innovation is a means, not an end. As Leonardo da Vinci said: “Simplicity is the highest level of sophistication”. Never forget that. One can claim to have truly changed the market when one’s innovative solutions are adopted by the masses of clients, thus modifying the dynamics of the system itself. So, it takes a lot of intuition, speed, vision and a sense of priorities. It must be the customer experience that one wants to develop, neither compliance nor technology.

What does innovation mean for the banking and finance sector?

It is a huge challenge because the sector is hyper-regulated, and in Italy even more so. But, at the same time, it is an adventure because the sector truly lives on schemes, services models, and infrastructures that are decades old, inadequate for digitalization. Therefore, it may be more difficult when compared to other markets that have already been transformed (music, publishing, travel come to mind) but this does not mean that it is any less intriguing. It is necessary to have more strength and decision in challenging the status quo and not be stopped by the first objection “this can’t be done”. If one tries hard enough there is always a way to change things. Always. 

CheBanca! is a startup: what goal did it start with?

We can define CheBanca! as a Fintech Bank, a new bank. It began in 2008, precisely when Italy was reaching its historic record for number of bank teller windows (!). It had another vision, to change the model of bank retailing in Italy and to position itself where the market would be heading. It is a native multichannel bank, focused increasingly more on its digital affluent. It acts strategically as a funding arm of our shareholder Mediobanca, guaranteeing the parent company direct access to collecting. But it does so in a disruptive manner in respect to the market, challenging from the inside the various status quo and consolidated business models. We have done it with physical retailing, with customer service, products, and we are doing it with payments and investment advisory. It may be a long path but with a very clear vision. We have over 500,000 clients and we have 13 billion in overall collections, even having passed through the darkest phase of the country’s economic and financial crisis. For years now we have been the best online bank for customer satisfaction. I’d say that’s quite a success. But we won’t stop here.

Thinking in general of the startup ecosystem, is it a resource or a threat for traditional banking?

Startups are the lifeblood of every sector. Challenging the market, bringing innovation, forcing incumbents to move, nourishing the competition and, thus, in the final analysis, favoring the improvement of the ecosystem. If someone sees them as a threat they are making a mistake. Those who wall themselves in are destined for extinction, it is just a question of time. We work with Fintech startups, we develop services. It is very good for us. And we help them grow and get stronger.

What is the most explosive idea that you have seen in recent months?

The one that most impressed me is IMPS, a real time mobile payments project in India. Just during the month of December in 2014, it registered over 9.5 million real time transactions, mainly via mobile – not necessarily smartphones –, surpassing by a good 5 times over its results from the preceding year. It has a user park of over 70 million digital account holders. A boom, and it is just the beginning. To sum it up, it managed to apply the success of a scheme like that of m-Pesa to a population of over 1.2 billion individuals. This is something that is truly breaking the mold and changing the game. True innovation is measured by the number of people whose lives it can truly improve. We tend to look towards the West, primarily the US, but I have the impression that innovation in the world of banking and finance will increasingly come from the south and east. There are many other examples in Africa, China, Australia, Korea…

And the external actors, like Facebook and Apple, who are making space in their sectors: what role will they have?

They will have the role of challenger, very strong because based on economies of scale and on client bases that are unattainable for any bank in the world. But I don’t think they will become banks in the true sense of the word. It is much more probable that they will concentrate on the most mass market and easiest to manage parts internationally, like with payments. It will not be easy to get out of the US. It will be a long path, just like it was for PayPal. I wouldn’t underestimate Amazon and Google. The first one already manages payments globally, the second has such a mass that it can do what it wants. There will surely be great disruptions from them as well. The wave is long, it started with PayPal, which was born in 1998.

Bitcoin is having yet another delicate moment: are we at the end of its trajectory or in a transformation phase? What future do you see?

Bitcoin is the second attempt at real time global digital currency outside of the control schemes of the central banks. With this, other virtual currencies were created just about everywhere. In my opinion, though, Bitcoin is still not a true currency and suffers from the same mechanisms that brought about its success one year ago: too much volatility and zero regulations. A year ago, it registered a positive value and, so, everyone was enthusiastic. Now, no, it seems like a failure. Because Bitcoin is perceived speculatively, as an investment, and not as an exchange value. The history of money teaches that exchange rates and values cannot be too volatile. This is the limitation of Bitcoin, though I don’t think it’s impossible to resolve. But, above and beyond its future, whether it will be successful or not – and this will definitely take years and years – Bitcoin is a sign that the current banking and transaction system on a global scale must confront digitalization. Currently, it is too old, obsolete. A different transnational system is necessary, that functions like the digital economy: real time on a global level, and, inevitably, with some form of transparent governance. Because, without trust, a currency does not exist. This is its true message.

 

ABOUT ROBERTO FERRARI

Roberto Ferrari  is the General Manager of CheBanca! and Board Member of Mediobanca Innovation Services, the IT and Operations service company of Mediobanca Group in Milan. He’s highly qualified in an international contexts in Marketing and digital channels field: since his degree in Economics and Business Administration, he spent his career in a very large enterprises as is Procter&Gamble in Rome, where he led sales development of franchising network and product marketing. In 2006 he entered in Mediobanca Group as Marketing & Partnership VP in Compass, the consumer finance and payment company of the financial Group, where he was in charge of marketing, product and business development activity.

ABOUT CHEBANCA!

The Italian CheBanca! is the retail bank of the Mediobanca Group. Born in May 2008, CheBanca! was the first financial institution in Italy to enter the market with a multi-channel distribution model that includes website, customer service and innovative branches.

Many are the initiatives CheBanca! promoted to support (fintech) innovation in Italy. In few years in fact CheBanca! created new sources of information as blogs, journals and databases, contests supporting and rewarding the most original and innovative Italian fintech start-ups, and a unique fintech community in Italy that acts as a catalyst for innovation.

PIV

The bank, based in Milan Italy (where I’m speaking at the MegaTrends conference in May) has been recognized on many occasions as an innovator from flagship futuristic branches to award-winning banking apps such as WOW!   What makes innovation in the Italian markets any different to most markets?  Roberto explains.

 

 

Chris Skinner: What does innovation mean at such an exciting historic moment?

 

Roberto Ferrari: Everyone is talking about innovation these days. The hardest thing is to manage the technology in order to provide new, simple solutions to clients. Innovation is a means, not an end. As Leonardo da Vinci said: “Simplicity is the highest level of sophistication”. Never forget that. One can claim to have truly changed the market when one’s innovative solutions are adopted by the masses of clients, thus modifying the dynamics of the system itself. So, it takes a lot of intuition, speed, vision and a sense of priorities. It must be the customer experience that one wants to develop, neither compliance nor technology.

 

Chris Skinner: What does innovation mean for the banking and finance sector?

 

Roberto Ferrari: It is a huge challenge because the sector is hyper-regulated, and in Italy even more so. But, at the same time, it is an adventure because the sector truly lives on schemes, services models, and infrastructures that are decades old, inadequate for digitalization. Therefore, it may be more difficult when compared to other markets that have already been transformed (music, publishing, travel come to mind) but this does not mean that it is any less intriguing. It is necessary to have more strength and decision in challenging the status quo and not be stopped by the first objection “this can’t be done”. If one tries hard enough there is always a way to change things. Always.

 

 

Chris Skinner: CheBanca! is a startup: what goal did it start with?

 

Roberto Ferrari: We can define CheBanca! as a Fintech Bank, a new bank. It began in 2008, precisely when Italy was reaching its historic record for number of bank teller windows (!). It had another vision, to change the model of bank retailing in Italy and to position itself where the market would be heading. It is a native multichannel bank, focused increasingly more on its digital affluent. It acts strategically as a funding arm of our shareholder Mediobanca, guaranteeing the parent company direct access to collecting. But it does so in a disruptive manner in respect to the market, challenging from the inside the various status quo and consolidated business models. We have done it with physical retailing, with customer service, products, and we are doing it with payments and investment advisory. It may be a long path but with a very clear vision. We have over 500,000 clients and we have 13 billion in overall collections, even having passed through the darkest phase of the country’s economic and financial crisis. For years now we have been the best online bank for customer satisfaction. I’d say that’s quite a success. But we won’t stop here.

 

Chris Skinner: Thinking in general of the startup ecosystem, is it a resource or a threat for traditional banking?

 

Roberto Ferrari: Startups are the lifeblood of every sector. Challenging the market, bringing innovation, forcing incumbents to move, nourishing the competition and, thus, in the final analysis, favoring the improvement of the ecosystem. If someone sees them as a threat they are making a mistake. Those who wall themselves in are destined for extinction, it is just a question of time. We work with Fintech startups, we develop services. It is very good for us. And we help them grow and get stronger.

 

Chris Skinner: What is the most explosive idea that you have seen in recent months?

 

Roberto Ferrari: The one that most impressed me is IMPS, a real time mobile payments project in India. Just during the month of December in 2014, it registered over 9.5 million real time transactions, mainly via mobile – not necessarily smartphones –, surpassing by a good 5 times over its results from the preceding year. It has a user park of over 70 million digital account holders. A boom, and it is just the beginning. To sum it up, it managed to apply the success of a scheme like that of m-Pesa to a population of over 1.2 billion individuals. This is something that is truly breaking the mold and changing the game. True innovation is measured by the number of people whose lives it can truly improve. We tend to look towards the West, primarily the US, but I have the impression that innovation in the world of banking and finance will increasingly come from the south and east. There are many other examples in Africa, China, Australia, Korea…

 

Chris Skinner: And the external actors, like Facebook and Apple, who are making space in their sectors: what role will they have?

 

Roberto Ferrari: They will have the role of challenger, very strong because based on economies of scale and on client bases that are unattainable for any bank in the world. But I don’t think they will become banks in the true sense of the word. It is much more probable that they will concentrate on the most mass market and easiest to manage parts internationally, like with payments. It will not be easy to get out of the US. It will be a long path, just like it was for PayPal. I wouldn’t underestimate Amazon and Google. The first one already manages payments globally, the second has such a mass that it can do what it wants. There will surely be great disruptions from them as well. The wave is long, it started with PayPal, which was born in 1998.

 

Chris Skinner: Bitcoin is having yet another delicate moment: are we at the end of its trajectory or in a transformation phase? What future do you see?

 

Roberto Ferrari: Bitcoin is the second attempt at real time global digital currency outside of the control schemes of the central banks. With this, other virtual currencies were created just about everywhere. In my opinion, though, Bitcoin is still not a true currency and suffers from the same mechanisms that brought about its success one year ago: too much volatility and zero regulations. A year ago, it registered a positive value and, so, everyone was enthusiastic. Now, no, it seems like a failure. Because Bitcoin is perceived speculatively, as an investment, and not as an exchange value. The history of money teaches that exchange rates and values cannot be too volatile. This is the limitation of Bitcoin, though I don’t think it’s impossible to resolve. But, above and beyond its future, whether it will be successful or not – and this will definitely take years and years – Bitcoin is a sign that the current banking and transaction system on a global scale must confront digitalization. Currently, it is too old, obsolete. A different transnational system is necessary, that functions like the digital economy: real time on a global level, and, inevitably, with some form of transparent governance. Because, without trust, a currency does not exist. This is its true message.

 

 

 

ABOUT ROBERTO FERRARI

 

Roberto Ferrari  is the General Manager of CheBanca! and Board Member of Mediobanca Innovation Services, the IT and Operations service company of Mediobanca Group in Milan. He’s highly qualified in an international contexts in Marketing and digital channels field: since his degree in Economics and Business Administration, he spent his career in a very large enterprises as is Procter&Gamble in Rome, where he led sales development of franchising network and product marketing. In 2006 he entered in Mediobanca Group as Marketing & Partnership VP in Compass, the consumer finance and payment company of the financial Group, where he was in charge of marketing, product and business development activity.

 

 

ABOUT CHEBANCA!

The Italian CheBanca! is the retail bank of the Mediobanca Group. Born in May 2008, CheBanca! was the first financial institution in Italy to enter the market with a multi-channel distribution model that includes website, customer service and innovative branches.

Many are the initiatives CheBanca! promoted to support (fintech) innovation in Italy. In few years in fact CheBanca! created new sources of information as blogs, journals and databases, contests supporting and rewarding the most original and innovative Italian fintech start-ups, and a unique fintech community in Italy that acts as a catalyst for innovation.

 

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Does anyone really need a mobile wallet?

Reflecting on another conversation at last week’s conference, there were lots of discussions about why the mobile wallet wars were lost.  No one’s won the mobile wallet war yet, not even Apple, but it is there to be won.  In fact I wondered why it took a firm like Apple to take up the mantra and aim for this crown – not forgetting WeChat, Alipay and others – and realised it’s because no one has yet worked out what a mobile wallet is for.

For example, PYMNTS.com came up with some interesting stats the other day.  The website did two surveys of iPhone 6 users – 400 people in November 2014 and 1,000 in March 2015 – in partnership with InfoScout.  The findings are intriguing.

The March 2015 numbers showed improvement over the November 2014 in all categories – 6 percent use the service (up from 5 percent), 9 percent had tried it but weren’t using it (up from 4 percent) leaving 85 percent who had never tried it (as opposed to 91 percent).

In the almost six months since Apple Pay launched, users have certainly become more willing to try Apple Pay – that category nearly doubled since InfoScout first measured it in November. So why weren’t those users using it more often and converted from “triers” to “users?”

The main reason those who had tried Apple Pay in the past, but didn’t on some transactions where it was available, seems to be forgetfulness – almost a third (32 percent) said they just forgot it was an option.

“Muscle memory is a challenge,” InfoScout Co-Founder and CEO Jared Schrieber told an audience at Innovation Project yesterday. “If I’m Apple, I’m dead-focused on point of sale and making sure there is a trigger to make sure I pull out my phone and not my card.” Schrieber further noted that Apple could perhaps leverage beacon technology as a triggering mechanism.

OK, so the mobile wallet has to be relevant and seen in the same way as card or cash, and it’s not right now.  For example, I mentioned other attempts to crack this markets include Japan with LIN£ Pay, a Facebook Messenger service that started late last year.  LINE has 170 million active users in 230 countries and the service is available globally except in Korea and China.  The service has been enhanced recently by Cybersource, but there’s little results yet.

In Korea, Daum Kakao launched BankWalletKakao and Kakao Pay.  In this case the internet giant Daum Kakao has partnered with 16 banks to enable bank transfers and online payments, as well as peer-to-peer payments that garnered 1.2 million users in the two months after launch, only to encounter teething troubles such as not being able to make payments on the first day of launch.  Still a way to go.

Probably the best success so far that we’ve seen is Tencent’s WeChat and Alibaba’s Alipay in China.  This is because they are both taking this seriously, investing heavily and aiming to capture this market for mobile money before anyone else does.  In order to do this, you have to create a reason – an incentive – to open up a wallet and use it.  Both companies achieved this by targeting the tradition of sending red envelopes of gifts of money to friends and family for Chinese New Year.

WeChat launched the first salvo in this market area last year.  According to Forbes, over 40 million virtual red envelopes, totalling 400 million yuan ($64 million), exchanged in just a few day.  As a result, millions of new users signed up to WeChat’s Tenpay payment system and linked their bank accounts to it. 

Jack Ma of Alibaba called the move a “Pearl Harbor moment” for his company and so, not to be outdone, launched its own virtual red envelope campaign this year.   According to Alibaba spokeswoman Teresa Li, 240 million virtual red envelopes were sent through Alipay on February 18 alone, accounting for almost 4 billion yuan ($640 million).

All in all, China is showing a different approach by focusing upon the use case for a mobile wallet, and reinforcing it with rewards.  In fact, this update from the Financial Times puts China’s approach to the market in perspective:

Third-party mobile payment providers [in China] processed Rmb6tn ($960bn) in payments in 2014, five times the previous year’s total, according to iResearch. That compares with $52bn in the US last year, according to Forrester Research, though that figure is set to grow following the launch of Apple Pay. Five months since its launch, Apple already accounts for two-thirds of all US mobile payments.

In China, most mobile payments are still used for online purchases, but thousands of brick-and-mortar retailers have begun to accept QR payments — made by scanning codes — over the past year.

Alibaba and Tencent have shrugged off a directive by China’s central bank halting mobile payments based on swiping barcode-like QR symbols and are moving aggressively to expand their reach to offline stores.

Retailers that accept QR-code payments through Alipay’s mobile app include 7-11 and Family Mart, two convenience store chains with a combined 3,100 outlets across China.

International fast-food chains Pizza Hut and Dairy Queen are also on board, along with local chains such as Old Auntie’s Boiled Dumplings. Meanwhile, at least six major department store and shopping mall chains accept QR code payments through WeChat.

“The central bank just suspended QR payments but didn’t ban them. After that they never put out any official policy, so Alipay and WeChat just kept on going,” said Qian Haili, internet finance analyst at China E-Commerce Research Center.

The use case, rewards and working around the regulations are all key ingredients to the China story which, in many ways, is leading the world.  After all, I’ve been blogging about this stuff for long enough to see that not many markets have yet worked out what a mobile wallet is for.

Take this example from three years ago: Let the Mobile Wallet wars begin, which had this chart of the key players in 2012 (doubleclick chart to enlarge):

O2 wallet1

Not much movement there, with Orange and O2 out of sight and Pingit moving along nicely … but not really as a wallet (yet).

Or take this research from December 2013: The Future of Money (in Denmark)which looked at what it would take to get consumers onto mobile wallets.  The main conclusion: consumers are ready for mobile payments, but that does not mean they will use mobiles for payments. There has to be a reason.

Simple, but darned hard as no-one’s really cracked this yet.  If anyone will, it’s probably Tencent, Alibaba and Apple.

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Why the mobile ecosystem just became easy

I have a good chat about the mobile financial ecosystem today.  Maybe a good example of that ecosystem is represented below:

Mobile Financial Ecosysmte

What this portrays is that it’s complicated.  There’s a lot of players doing a lot of things and the bank has to herd cats to make it work.

What’s interesting though is that this slide is from 2013 and things have changed.  Take Apple Pay launching with Stripe to create a front end payments system that simplifies stuff.  Take the roll out of APIs, such that anyone can incorporate any payment into their systems anytime, all the time.  Take the simplification of technologies and usage through cloud, apps and the increasing open source software movement in banking and payments.

Add all this together and what I get a sense of is that there was an old way of thinking last decade that created a tough ask for banks.  Banks, in order to be rollout a mobile payment service, would have to work with multiple players like the telco providers, handset makers and more to create a mobile payments service.   This would involve greedy telco’s asking for a high stake of fee and payment to allow the banks in the game, and led to many failed attempts to get these things off the ground.  Just think of the Mobey Forum, Simpay and more, to see how difficult it was.  The partnerships just didn’t make sense a decade ago.

But then the telco’s got pushed out of the picture because we have moved from mobile proprietary services controlled by mobile network operators to mobile open services through the mobile internet of apps.

That really has changed things as anyone can now offer a service anywhere.  This is why Venmo and TransferWise have kicked off so fast, and why Apple Pay and Facebook Pay can leverage rapid scale uptake if they get it right.

Within all of this, you then have players who are creating higher value and higher valued services, such as Square.  Square takes a good fee – up to 3.5% + 15 cents per transaction – from their service but, customers don’t mind as before, they couldn’t even take a payment.

And there’s the big news.  We have a very different world of value exchange with anyone with a bright idea able to jump on the bandwagon of making and taking payments using apps, API’s and cloud.

That’s why, just to put in context, TransferWise has achieved this.

According to Payments Source since its founding in 2011, TransferWise has processed roughly $4.5 billion and saved users around $200 million in bank transfer fees. 

No wonder because a mystery shopper exercise commissioned by the company found that the cost of sending $1,000 from the US to Germany was on average $68 cheaper when using TransferWise versus 11 different US retail banks — but this process is only possible because of the existing banking system.

Mind you, the comment from banks is that they’ll only have this advantage whilst they avoid the cost of regulation and compliance overheads.  That’s a big deal as, per their American market opening, the regulatory cost of setting up in the U.S. market could be as high as $3 million.

So the new entrants really only have advantage for as long as they can avoid the burden of the regulatory structures of banks … or so some say.

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The Finanser Interviews: Jon Matonis, Crypocurrency Economist

Bitcoin still stirs up a huge debate about where it will go in the future; will it become institutionalised; what is the blockchain going to do to banking; and more.  In order to clarify the debate, we interviewed Jon Matonis, a renowned expert on bitcoin and cryptocurrencies, to find out what is the truth.

Jon Matonis

Tell me about yourself and your background Jon. 

I was involved with the Bitcoin Foundation since its inception, starting in 2012, as one of the founding board directors. At the end of last year I decided to retire from the Foundation board and give other people the opportunity to step forward and work on the board.

It was never meant to be a lifetime gig for any person.  Prior I was working in the payment space at Visa and VeriSign, working on the public key cryptography for online banking, and prior to that I was an FX and Derivatives trader for commercial banks. I have been blending all these skills into this new brand amazing field of financial cryptography.  

What’s the future of the Bitcoin Foundation?

In terms of the Bitcoin Foundation going forward, it still is an excellent institution. People should be encouraged to join it, as it does pay for some of the core developers’ compensation. It doesn’t pay for all the compensation, as no one entity controls Bitcoin development.  It is an open source project so it’s not a centralized power struggle, but does provide some compensation. The main focus of the Foundation today, which is slightly different from when it first founded, is to develop a standards body for Bitcoin Core, along the same type of protocol standards as the IETF. It is premature to just automatically throw that over the fence with the IETF standards process, as it would be lost. It has to mature, has to have more participation, more advocates to allow it to thrive in an IEFT structure. That is what the Foundation is preparing the protocol for, so that eventually it will go into a larger more rigorous standards body process.

You mentioned you’ve been a trader and involved with the payments industry so why did you get interested in bitcoin?

I had always been studying and focusing a lot of my research work on digital currencies and alternative monies. Even prior to Bitcoin going back to Digitcash and E-Gold days. In late 2009, I got introduced to Bitcoin by a random email from Satoshi Nakamoto.  I didn’t give it much thought at the time and then 3-4 months later I started to focus upon it. It seemed to solve a lot of problems encountered by the first generation digital currencies, primarily around the centralization issue for preventing double spends. That’s the real breakthrough and is what got me excited both as a trader and as a digital currency monetary theorist. Bitcoin came up with the way to solve the double spend problem, without having to go back to a centralized mint for reissuance or confirmation that the units weren’t double spent. The cryptographic principles for Bitcoin have been around prior to the launch of Bitcoin. There was nothing uniquely new about any of the individual components but it was unique in how it was assembled as a peer-to-peer distributed environment. That was the real breakthrough.

You say it’s decentralized, which often raises the question: is this money without government.

Well the decentralized and peer to peer computing capabilities are the wave of the future. So that is definitely going to last. I see that growing in fact rather than going in the other direction.

In respect to the ‘money without government’ phrase, we actually have always had money without government going back to the evolution of money, even gold and pre- gold barter days. Gold was the form of money without government before the kings and monarchs started stamping their image on them. So I don’t see concept of money without government as being something impossible to achieve.  Instead, we are regaining something that was lost. 

But regulators and government officials, when it comes to a value exchange that is unregulated, worry about drug runners and terrorists. Do you see that as a threat? 

I don’t see it as threat. It’s not specific to Bitcoin and other crypto currencies.  Any type of value exchange medium for small or medium transactions are subject to abuse.  The tradeoffs are that you have to severely clamp down on the benefits of having digital money in an absolute way, to prevent something happening on the negative side in an absolute way.  What I mean by that is that the so called drug and criminal communities that you’re labeling, dwarfs what’s happening in Bitcoin. You don’t blame the monetary unit for the actions of the criminals.

I agree with, although another problem of an unregulated value exchange system is that you get lots of hacking and issues like MtGox and Bitstamp failures.  These things give Bitcoin a bad name. Do you see a structure to give consumers more assurance that it is safe to use?

Let’s talk about MtGox and the episode of Bitstamp. Regulation cannot be a panacea for ‘caveat emptor’ (buyer beware). Regulation cannot be a panacea for everything. It rarely works in a way that a government intends it to anyway. Look at episodes in the United States where Lehman Brothers and MF Global were both regulated entities and meant to be safe.  They weren’t. So in terms of protecting consumers, that is just what the government regulators put forward for the justification of massive regulation in the Bitcoin arena. We are now seeing major areas of Bitcoin being involved with best practice though.  If you look at the recent BitStamp episode, that actually resulted in adoption of new multisig technologies for Bitcoin and cryptocurrency exchanges. So the solution with BitStamp generated a more robust and stronger exchange system, which happened outside the action of any government regulation.

Alongside that you are seeing firms like BitGo, which was the multisig company, and companies like Xapo, CoinBase and more adopting their own private insurance to provide customer security and peace of mind for any funds that they choose to leave there. So the market is stepping up, through best practices and through providing these solutions. The main take away from MtGox, which happened over a year ago, is that it demonstrated the exact opposite of too big to fail capitalism. It’s always curious to me that some the critics of MtGox would prefer a world where the tax payers always steps in and bail everybody out. That’s not the world we need to be moving towards, so that MtGox was allowed to fail on its own accord should be taken as a positive sign that the system is working.

It’s interesting that traditional value stores have started to pick up on Bitcoin since failed. A lot of institutions that have got licenses and government regulation are starting to try to incorporate cryptocurrency and blockchain technology in what they do.  That feels like a movement towards the institutionalisation of cryptocurrency. Do you think that will happen or would that be the opposite of the wishes of the community that created this capability? 

Well the wishes of the community don’t really matter here and the institutionalisation of Bitcoin will be jurisdiction by jurisdiction.  Going back to your other point though, the exchange environment has matured significantly over the 12 months since MtGox and that’s a beneficial sign.  Not only are they aware of this, but the service providers are a lot more robust.  Some of them are taking steps on their own in anticipation of future regulation but to present a more mature offering. Users of these services have also worked out that it’s not right to use firms like MtGox as a bank vault, which they should have never been using as such in the first place.  So Bitcoin gives you a way to control your own assets and not required to leave everything on balance.  It’s down to your own guidelines and comes back to what I said, caveat emptor, whether its regulated or unregulated. 

On the institutionalisation of Bitcoin, you will start to see that happen. I don’t think this is a negative and, as mentioned it will be jurisdiction by jurisdiction. Trading liquidity, increasing volume and depth of the market will lead to institutionalisation.  It is unavoidable that we will get to a phase where we see Bitcoin derivatives type instruments, which we are already starting to see evolve in certain markets.  It will be just like any other commodity that goes through stages and develops.  We are just seeing that on a faster time horizon with Bitcoin, which seems like it is moving a lot more quickly. We will get there. 

I can see it happening. That’s why you see innovators like Fidor Bank and Circle creating cryptocurrency consumer guarantees and assurances, similar to traditional regulated banking licenses, but in the new model world rather than the old model world.  Is this the correct view?

It is a correct view. We are also starting to see it on an international level. You will have the small local regional players, but you will start to see the ones that are large have a global footprint, which will end up only being beneficial because a global footprint for a cryptocurrency type operation really sets the stage for entry into the remittance market. When you have a global player that covers multiple countries you’ve pretty much displaced the functionality of someone like Western Union.

That’s where things get very interesting. For example, Ripple is working with Wells Fargo and other banks to have their technology capabilities incorporated but using other cryptocurrencies than bitcoin.  Will we see a different cryptocurrency arrive?  Is bitcoin the one?

Well there are already over 300 crypto currencies that come and go. Bitcoin has the majority share at almost 99% share. Bitcoin is the dominant player. Ripple is making a lot of progress with financial institutions, as they are making this area their main focus of attention. I don’t see systems like Ripple as being truly decentralized however. They have distributed deployment, but the currency unit itself is entirely pre-mined by the founders of the currency.  That means it is not decentralised, as there are people who work out where to deploy that initial currency unit. The Ripple currency XRP is what they use as a glue to hold everything together and the test as to whether something is truly decentralised is: who will be the financial winner with Ripple’s success? Ripple has lots of venture capitalists participating in it, and investors in XRP. Those people will be the winners. Because of that Ripple doesn’t take them away from a single point of failure. Their implementation with lots of financial institutions, and what they are trying to do with various asset webs and connections, is very appealing to banks as it makes it subject to oversight and regulation.  At some point, when you traverse everything in that world however, there is still a single point of failure. Regulators like to have that single point at the end of the day, because then they can regulate it. Bitcoin doesn’t give them any type of single point to focus on.  That’s why it’s democratized value.

So if Ripple is not the solution, how will banks manage cryptocurrencies into their operations?

This is actually a very interesting area.  I am starting to focus on it a lot more in my work as, in some ways, it’s the flip side of Ripple and alternative cryptocurrencies that want to do their own independent blockchains. What we are starting to see evolve are banks beginning to leverage the existing Bitcoin blockchains.  The blockchain that already exists, rather than trying to recreate something that will be a second or third tier chain. The reason this is interesting is that it’s already there to be exploited.  The fact is that banks just have to figure out a way to connect to the Bitcoin network, which gives them the same type of liquidity and ability to do the large amount transactions they currently have on SWIFT.

An interesting company that illustrates this development well, came out of the SWIFT innotribe challenge last year coincidentally.  This is a company called epiphyte based in London, and with offices in New York.  They created an interface for commercial banks on both sides to be able to leverage and utilise the Bitcoin network, in lieu of using Fedwire or CHAPS or SWIFT, who are liquidity providers.  The banks never end up touching the cryptocurrency. This solves the challenges of correspondent banking for large global banks, who have to tie up a lot of capital in counterparty cover.  Equally, there are other parts of the world where banks do not want to leave a lot of money with their correspondent banks, due to the counterparty risk.  If they can leverage something like the Bitcoin blockchain then this will have significant impact on the future of correspondent banking worldwide.

That’s one of the reasons I believe bitcoin as a cryptocurrency has more relevancy at the wholesale level, replacing both Hawala and correspondent banking structures at the same time.

So if I summarise what we have covered so far, you believe we will have a jurisdiction-based system that regulates usage at a national level but, because it’s incorporated by banks into wholesale bank structures, it massively reduces costs. Is that how this plays out?

Yes.   It’s important to look at jurisdictions, as jurisdictions do have the ability to regulate the in-and-out functionality of their own currencies into cryptocurrencies.  When you talk about a country having Bitcoin regulation, what they are really regulating is their own currencies exchanged into and out of another cryptocurrency. That’s what you’re seeing at bitcoin exchanges and banks, and will be one primary level of regulation.

Beyond that, you will have a whole parallel world which will exist person-to-person.  In some ways that world is more interesting than person-to-business use of cryptocurrencies as in a person-to-person environment, similar to using Skype or using encrypted email, you find new ways of doing things.  In this case, you have an independent financial messaging system which has allowed us to create a large global value exchange network. That secondary level of exchanges, person-to-person or otherwise, with a cryptocurrency like bitcoin is outside the control of regulators. That’s not even an area where the regulators have a remit, and is why they will have to focus upon when cryptocurrencies are converted into and out of their own national currency.

So that person-to-person exchange, what will be the protection mechanism that will take place in that the system? Will free agents manage the system?

Well ultimately this will rely on the Bitcoin blockchain, which is secured by the power of the overall mining participants. This represents the largest distributed and secure computing project in the world. In aggregate it exceeds the top 500 or 600 super computers combined. 

And here, I want to make a point about the price of bitcoin, as this comes up a lot. I don’t think watching the price is that important. It’s more important to look at the number of projects and developers working on building user friendly solutions. It is more important to focus upon the installed base of bitcoin wallets.

At the end of the day, the bitcoin price should reflect a price level that is sufficient to protect the aggregate value of transactions that are arriving over the blockchain. If you extrapolate that forward and say that a lot more economic activity is occurring on Bitcoin blockchain, then the security reaches a level that is consummate with the value riding across that decentralized value transfer network. As a result of this, that will tend to slowly increase the natural price of Bitcoin. That’s the only way to guarantee that the transactions riding across the network will be secure.  Then people will be willing to pay for that additional security in increased transaction fees.

It’s a feedback loop, as you won’t have those transactions occurring if the miners aren’t rewarded through a higher price of bitcoin. You won’t have the higher price of bitcoin if the transactions aren’t occurring in the first place. So it’s very much a feedback loop in a two-way structure.  That’s why I don’t put a lot of effort or thinking into the alternative cryptocurrencies, as they tend to be distraction for building the strongest leading network that we need for migrating economic activity and commerce.

Final question Jon.  If you were a betting man and you were betting on what will happen in the future, where would you put your money… or don’t you use money anymore?

I do have to still use money in some cases and also credit cards but, if I look at it from a Bitcoin investment point of view, I would bet on investing in the actually currency and using that as a proxy for the sector, rather than choosing individual companies. I think it’s unique and rare that we have an opportunity in the investment world to choose a currency as a way to invest into an entire sector. It is a proxy for the sector.  If there was a way to invest into healthcare through a healthcare currency, you have that now for investing in bitcoin as a cryptocurrency for the digital value exchange sector.

In terms of your portfolio, I look at this in the same way as gold.  If people are comfortable in having 10-15% of their overall net worth in something like gold and precious metals, then equally they should be comfortable in having 10-15% in bitcoin. It’s investing in assets and commodities on a portfolio percentage basis.  I think this whole transition that you describe as the ValueWeb  will be complete when we start calling gold an analogue version of bitcoin.

 

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