Banks mostly aren’t interested in bitcoin, but they are interested in the software that runs the digital currency – the blockchain.
Banks run on systems that were in some cases built decades ago and as a result are slow, costly and cumbersome. The blockchain – the program that lets people send bitcoin to each other and records those transactions – doesn’t have these legacy issues.
The blockchain keeps a public record of transactions, spread across a distributed network, and allows much quicker transfer of balances. As a result, sending bitcoin is faster, cheaper and more transparent than sending traditional currencies.
That makes it attractive to banks looking to soup up their money transfer businesses, but the technology also has potential in other areas – distributed ledgers could be used for “smart contracts” when banks make loans, for example, recording who’s borrowed what across a public network.
“We have internally identified 20 to 25 use cases where this technology can be applied,” Mariano Belinkey, head of Santander InnoVentures told Business Insider at MoneyConf in Belfast this week. Belinkey reeled off international money transfers, trade finance, syndicated lending and collateral management as some of the areas where blockchain technology could be applied.
Santander, the world’s tenth biggest bank and the second largest in Europe, is one of several lenders investigating how to use the blockchain in traditional banking. UBS has set up a blockchain research lab in London, Goldman Sachs has invested in bitcoin startup Circle and Nasdaq is also experimenting with the technology.
It’s pretty clear why the banks are doing all this. As well as making their systems smarter, it could save them a huge amount of money. A report co-authored by Santander earlier this month estimated that blockchain technology could reduce banks’ infrastructure costs by up to $20 billion (£12.8 billion) a year.
Julio M Faura, head of innovations at Santander, told Business Insider: “For us, the first obvious space to explore all of this in is payments, particularly international payments. Later on we think smart contracts have the potential to transform many of the other things we do.
“We still haven’t made anything official, we haven’t announced anything publicly, but we have an internal team working on this. We’ve done some proof of concepts.”
Faura is heading up a team in Santander dubbed Crypto 2.0 – referring to cryptocurrencies – which is carrying out experiments with the blockchain and digital currencies.
Santander InnoVentures, which Belinkey heads, is the Spanish banking giant’s $100 million (£64 million) fintech investment fund, launched last year. The fund has made 3 investments so far and Belinkey said 2 more are close to completion. A source told Business Insider that one of these is a startup working on blockchain technology. Belinkey declined to comment.
Belinkey told BI: “We’re very excited about distributed ledgers and blockchain technology. They really have the potential to disrupt many of the basic processes we have underlying our transactional products.”
“What we see as the foundation use case, which is international payments, we don’t really need a coalition of 50 banks to make it work. We have ten major geographies. Just us connecting our ten major geographies will allow 100 million customers to make instant payments worldwide. If we partner with two or three banks similar to us we’ve got pretty much global coverage.”
But Faura adds: “This thing will only be interesting if many banks take part and collaborate. We are talking and experimenting with several banks.”
Belinkey chips in: “It’s like having the first phone – there’s no point, you can’t ring anyone.”
He adds that while Santander is very keen to explore the possibilities of blockchain, we won’t be sending cash over blockchain networks any time soon. Belinkey says that “while getting to a working prototype could be something that we do within months, getting to an actual product that regulators say is good to go and the compliance guys like – that will take a while.”
Stephen Pair, CEO of bitcoin company Bitpay, told me during our interview at MoneyConf that he’s in conversation with several banks about the potential of blockchain and related technologies. But he said: “I’ve been in and around banks for a while and they take years, even with software that’s well known and well understood.”
Pair thinks it will be at least 5 years before any banks seriously adopt a version of blockchain technology.