Research analyst of French financial institution BNP Paribas, identifies 5 ways cryptocurrencies could shake up finance and asset servicing, and suggests banks to "invest time and energy to understand how they can best make use of them."
Earlier this week, finance professor and former Federal Reserve Bank examiner Mark T. Williams, pointed out the top-10 risks associated with Bitcoin in a presentation at the World Bank conference. According the Williams, these risks include Bitcoin's sovereign attack risk, and the threat of an eventual collapse of central banks.
The professor has been subject to a lot of criticism from the crypto community, and a satiric website called professorbitcorn.com, was even launched to highlight the professor's inaccurate predictions on Bitcoin's prices.
This time again, critics have been striking the professor on his most recent presentation. These critics mainly target his argument on the necessity of the monopoly power held by Governments over currency creation, which he believes is for the greater good of citizens.
"Governments exercise a monopoly power on currency creation with the understanding that doing so will provide its citizens with a greater level of economic stability," argued the professor.
Not everyone agrees with this statement, and Kyle Torpey from Inside Bitcoins is among the skeptics:
"Whether you’re talking about the United States or Zimbabwe, the idea that central bank regulators are economic monks that are immune from corruption and error is laughable. We’re only five years into the bitcoin experiment, and this new digital currency paradigm is already competing favorably with certain central banks around the world."
Further, Torpey noted the cases of Argentina and Venezuela, which are both experiencing severe inflation, to highlight the incompetence of such governments in providing "citizens with a greater level of economic stability."
While most of bankers have been arguing on the risks of the disruptive nature of Bitcoin on our traditional financial system, some of them believe it is a technology that could benefit the banking industry, and which needs to be understood by the banking sector.
In a report published in late October by BNP Paribas's magazine Quintessence, research analyst Johann Palychata describes the 5 potential disruptive impacts of cryptocurrencies on the banking industry, and advices financial institutions to spend time and energy on understanding the technology to "make best use of them before other players step in to make that decision for them."
"Many describe Bitcoin as currency. Ultimately its more revolutionary impact could be as a technological tool for the financial world."
According to Palychata, Bitcoin as a means of payment, allows merchants to "bypass the payment card industry, which can retain a hefty 2% cut of a transaction's value." The research analyst notes that many startups are developing Bitcoin payment terminals for both brick-and-mortars, as well as online businesses, and thus, predicts "the slow emergence of an ecosystem to accommodate a broader use of crypto-currencies in the real economy."
Further, Palychata believes large corporations might decide to use the Bitcoin network rather than existing settlements systems, as the network operates continuously, and has settlement batches every ten minutes.
Palychata continued with the blockchain's potential use as a decentralized infrastructure for securities issuance and servicing. He noted that initiatives such as Mastercoin, Ethereum and NXT, have already started facilitating the issuance of equities and bonds, and added:
"These initiatives might first appeal those who are already raising money through alternative channels such as crowdfunding. However, we might not be far from the day when a quoted company says that coins (that we could call ‘Bitshares’ to distinguish them from the currency coins) represent shares of its capital."
As a worldwide network, Bitcoin could become the largest fund distribution platform, offering many benefits, such as the reduction of costs and fast investment process, argued Palychata. These elements, he added, could give a major competitive advantage to fund management companies using the technology. He stated:
"Investors, meanwhile, could operate with increased flexibility and liquidity, safely selling shares at any time to other willing investors without any intermediary. The protocol can also handle delivery versus payment. Investments funds have a good chance of becoming one of the first real banking users of cryptocurrencies, providing a standardised platform for international fund distribution."
Finally, Palychata believes the Bitcoin protocol scripting feature could be used for international trades, and thus, radically alter international trade finance:
"The scripting capabilities of Bitcoin allow complex transactions to be set up between two commercial partners. In this specific situation, a buyer importing goods into a country can make a time-limited deposit to prove that he is solvent at the time of the order. Only the seller can unlock it - but this unlocking option is available to him only after the buyer acknowledges receipt of the goods. If the goods are not delivered in the defined timeframe, the buyer gets the deposit back."
"The development of an alternative to the current baking system is under way," says Palychata, and given the technology's potential to revolutionize banking practices, financial institutions need to start researching the different ways to benefit from the technology, concluded the research analyst.
BNP Paribas is a French financial services company headquartered in Paris. In 2012, Bloomberg and Forbes ranked the group as the third-largest bank in the world by total assets. In the same year, the firm was rewarded the 2012 Bank of the Year award by Thomson Reuthers' International Financing Review.
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