Few people — if any — measure their wealth in bitcoins, but the technology underlying the cryptocurrency is already changing the way banks think about their business, according to Julio Faura, SM ’00, head of R&D in the Innovation Division of Santander Bank, who spoke at MIT Sloan Dec. 13.
“In banks, it’s very difficult to innovate,” said Faura, whose talk focused on blockchain, the system that bitcoin uses for its public, shared ledger of debits and credits. “Now we have a way to represent money on a distributed ledger. It’s like a natural extension of the core banking system but suddenly very cheap. Also it’s safe because of cryptography. It’s a big thing.”
Faura outlined the basics of bitcoin, a peer-to-peer payment system that relies on its community to verify entries to the ledger (similar to crowdsourcing), rather than depending on a bank to confirm what is or is not in an account.
“Bitcoin was created to eliminate the need for trust in the world,” Faura said.
Bitcoin’s distributed system makes it extremely difficult to tamper with the network, and that is an appealing innovation because security is a major expense for banks. Faura noted that Santander spends $6 billion a year on information technology to keep its financial systems secure.
However, the bitcoin currency is highly volatile since it is not connected to any bank and nobody controls who participates in the system. Because it’s anonymous, the system is also open to misuse. “It’s the perfect coin for a business case around illegal things,” he said.
Nevertheless, Faura said banks are beginning to see the benefits of applying blockchain technology to their own financial problems. For example, transferring money between banks today remains slow and inefficient, as the banks involved each maintain separate ledgers, which need to be rectified for the transaction to settle. “A distributed ledger is a single source of truth,” Faura said. “It’s faster and much more efficient.”
One fundamental problem with bitcoin, Faura said, is that it is not linked to an accepted real-world currency. To address this shortfall, Santander — in collaboration with several other banks — is introducing the “utility settlement coin,” a digital currency based on accepted central bank funds such as euros or dollars. Due to launch commercially in 2018 (according to published reports), this currency is designed to speed transactions by eliminating the delay inherent in converting one currency to another, while minimizing risk by making the network permission-based (open only to trusted financial actors) rather than public.
“It’s a very ambitious project,” Faura said. “All financial actors are able to trade with each other using cryptographic tokens.”
Another innovation Faura anticipates will involve adding instructions to the information included in the distributed ledger. “Instead of an amount, you have a small program, which describes the rules by which the money is spent,” he said, enabling legal contracts to be bundled with transactions.
Faura said banks need to innovate because financial technology providers are continually pushing the boundaries of banking. For banks to compete, they will need to become more efficient.
“We either reduce the costs or we’re going to disappear,” Faura said.
Faura’s talk, “The Real Blockchain Disruption: What if Banks Adopt First?” was co-sponsored by the MIT FinTech Speaker Series and the Martin Trust Center for MIT Entrepreneurship.