After several years of resistance, more and more financial institutions are either outright embracing blockchain technology or at least giving the possibilities some serious thought. Others are investing in blockchain startups or adding digital assets to their investment portfolios.
Why the change in attitude? Once you strip away the early objections to cryptocurrency, it’s easy to see how the underlying blockchain technology can address many of the primary concerns that have impacted financial institutions and their customers in the 21st century.
Increased Transaction Speeds Benefit Everyone
One reason why consumers have been interested in cryptocurrency is that it offers faster transaction speeds around the globe. In a society used to high-speed internet and same-day Amazon prime deliveries, a 1-3 day transaction time for a domestic money transfer, and potentially longer for international, seems unacceptable.
But these slow transaction times have impacted institutions as well.
In 2018, HSBC made what was believed to be the world’s first commercial trade-finance transaction using blockchain. The deal, involving a shipment of soybeans, US agricultural group Cargill, and financial institutions HSBC and ING, was performed on the R3 blockchain platform. Normally such a transaction could have taken 5-10 days. Using R3, it was complete within 24 hours.
What is the impact of cutting the time of a transaction by 80-90%? It’s not just about having a deal completed more quickly. It’s about the reduced manpower spent on completing the deal, and about the increased security involved in using distributed ledger technology. At the time, HSBC estimated that putting all of Asia Pacific’s trade paperwork on a blockchain platform could reduce the time “time of exporting goods by up to 44% and cut costs by up to 31%.”
Institutions Developing Their Own Cryptocurrency
While many banks and financial institutions have embraced the blockchain but shunned cryptocurrency, others are actively embracing digital assets. JP Morgan has shown great interest in blockchain, from forming a division called Quorum to develop blockchain products (including the eponymous blockchain), to investing in blockchain companies (such as Axoni, one of Forbes’ Fintech 50 2020 picks), to the creation of JPM Coin, their bespoke “cryptocurrency.”
What is the benefit of a financial institution creating their own digital assets? It allows them to offer their customers the benefits of cryptocurrency, while still maintaining more control over the assets. JPM Coin is a payment coin pegged to the value of the US dollar. To be clear, JP Morgan still remains skeptical of bitcoin and other decentralized cryptocurrencies, but they can clearly see why their customers are interested in these asset classes and have chosen to try to harness the benefits.
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JP Morgan is not the only one embracing cryptocurrency and blockchain for payments, either. Before the launch of JPM Coin, Signature Bank had already launched their Signet platform, which allowed B2B consumers to quickly and easily send each other millions of dollars. Although significantly smaller than JP Morgan, Signature Bank is noteworthy for being willing to work with crypto and blockchain startups, while many financial institutions have refused to do business with such companies.
What Does This Mean for Investors?
As major players such as HSBC and JP Morgan push forward with their blockchain initiatives, other institutions will have to follow suit or risk being left behind in the march of progress. This continued acceptance and adoption of blockchain and cryptocurrency is having an impact on the market — institutional confidence increases consumer confidence.
Because of this, both private and institutional investors are finding benefits in adding bitcoin (BTC) and other digital asset products to their diversified portfolio. We’re seeing a growing movement towards viewing BTC and crypto as just another asset class, worthy of being held alongside stocks and bonds.
Still, this is a new asset class with its own unique challenges. Investors would be well-advised to educate themselves on bitcoin, digital assets, and the blockchain before choosing to add crypto or blockchain investments to their portfolio. Learn from experts on the market in general and crypto markets specifically in order to make the smartest choices for your investment goals, and avoid the pitfalls that have trapped unwise investors in the past.
Much like how personal computers, the internet, and smartphones all changed our lives during the late 20th century and early 21st century, blockchain has the possibility to completely change the way the financial industry does business. Now appears to be an ideal time for investors to get onboard and take advantage of the gains possible from increased adoption of blockchain and more widespread use of cryptocurrency.
On Yavin is the Founder and CEO of Cointelligence and the blockchain and cryptocurrency education platform Cointelligence Academy.