An Open Letter to Banks and Financial Institutions

Advice to Ignore at Your Own Peril

By Paul Jones and Albert Szmigielski


To Whom It May Concern:

And concerned you should be, gravely. A storm is brewing on the distant horizon, more clearly visible to some than others. From our lookout perch, using high-tech vision enhanced with deep research, the threat is unequivocal. Decisive timing is uncertain but the path well-defined. You can put your heads in the sand, ignoring this destructive force, hoping it will dissipate, suddenly change course, or just die out, but thorough preparation is essential to weather the storm if you hope to survive its devastating aftermath. The tempest is growing with momentum increasing, absorbing the energy from superheated seas, the eye of the hurricane is well-formed, and our forecast predicts, you, the antediluvian financial sector, will receive a direct hit.

A subversive idea pronounced in a 2008 white paper, discussing a new “peer-to-peer electronic cash system,” heralded the coming storm. In early 2009, the Bitcoin software release seeded the thunderheads, unleashing the first successful decentralized money protocol and corresponding blockchain. Like any other storm, it started small, barely noticeable, not even on the radar. A couple of years later, the breakthrough of Bitcoin became apparent to a critical mass of people—a brilliant solution to the long-standing problem of double-spending that plagued earlier incarnations of digital currencies had been found! But even more importantly, the awakening and realization that Bitcoin embodies far-reaching implications for disintermediating trust. The blockchain is a clever means to store information and value; a decentralized, massively replicated, transparent, and immutable ledger, secured by software-engineered incentives, and more hashing power than all the world’s supercomputers combined.

Bitcoin strikes at the heart of the banking and financial industries whose business models depend on their exalted status as “trusted” intermediaries. With Bitcoin, reliance on third-parties is no longer theoretically or practically required. Unconsciously, and instinctively, the legacy banking institutions recognized the threat a few years ago and entered the first of five emotional stages experienced by those losing a loved one to the inevitable process of death and dying: denial. Initially, Bitcoin was ignored by most, laughed at, even ridiculed, and quickly dismissed in disbelief. Lasting more than seven years now, the storm isn’t going away, peels of thunder can be heard in the distance, moving most stakeholders well beyond the initial stage of denial.

Let’s take a look at the other four stages of loss: anger, bargaining, depression, and finally, acceptance.

Russia is probably the most significant country taking an overtly angry stance toward Bitcoin, deeming it illegal and imposing severe penalties on violators. Bolivia, Vietnam, and Bangladesh are also in the minority of countries banning cryptocurrencies. The five stages of loss don’t necessarily unfold in a linear fashion, and phases can come and go and even overlap. In contrast to Russia and a few other smaller countries, most high-profile global banks and financial institutions have entered the bargaining stage, researching the potential of permissioned ledgers, borrowing part of Bitcoin’s architecture in hopes of owning and controlling an open source innovation, not amenable to being suppressed or privatized. You cannot take heaven by storm! Nevertheless, the bargaining is in full swing. Bitcoin’s intrinsic potential is recognized, but the banks want to try and control it themselves. We can hear them pleading and praying: “please let us maintain our profit margins and customer base and privileged position, we accept that a blockchain can be more efficient and secure, but please, please let us have our own private blockchain to protect us from the threat of the Bitcoin storm.”

Academics at University College London, aligned with interests expressed recently by the Bank of England, are researching the potential for central banks to issue their own cryptocurrency, RSCoin, while maintaining control of the monetary supply, unlike Bitcoin that relies on a predictable algorithm for the creation of new digital currency. The RSCoin design also hopes to overcome scaling and cost concerns associated with Bitcoin. While these are currently real issues for Bitcoin, we would argue that scalability and technical challenges are best overcome in an open source environment as opposed to private corporate or bureaucratic government initiatives. There were many so-called experts who thought the Internet would never be able to scale up to meet growing network demand, but its open and permission-less nature allowed free-market technical innovation to resolve barriers to growth, diffusing high-bandwidth capacity to most corners of the globe. The same story is likely to unfold with Bitcoin.

The R3 initiative is perhaps the most prominent indicator that banking institutions have entered the bargaining stage of loss and grief, full force and en masse. R3 is a financial innovation research firm, leading the Distributed Ledger Group (DLG), a consortium of 42 global banking institutions seeking to harness the power of the blockchain, by building their own private financial grade ledger, global collaborative testing laboratories, and commercially viable applications. R3’s website makes the very real observation: “Distributed ledger technology has the potential to change financial services as profoundly as the Internet changed media and entertainment.” True, but have we all forgotten recent history? The Internet is a public, open source platform, not the private domain of a select consortium. History may well be repeating. It was only 23 years ago when the first web browser was first developed. At the beginning, the Internet was largely dismissed by banks, corporations, and businesses of all sizes. This early denial allowed disruptive innovators like Yahoo, Google, Amazon, and eBay to emerge and eventually flourish.

Email, as an emerging killer app for the global web, was treated like Bitcoin is today—a good idea to emulate for internal business-use only, but stay away from the external interconnected world of the Internet—criminals and all kinds of seedy characters lurk out there! Corporations and banking institutions, attempting to control their proprietary communications, poured vast quantities of money into building and maintaining their walled-garden intranets, built in anger and denial of the ascendancy the world wide web. These private intranets eventually crumbled under the weight of their own obsolescence in the face of a globally embraced communications network, access to which is now considered a fundamental human right, the public and open source Internet.

Why will it be any different this time? Are we witnessing history repeating, or at least rhyming? Global businesses and banks interface with the entire world, not just their employees. To maximize utility, any internal private blockchain will eventually need to connect with the “outside world,” and all the security threats that poses. This will be the real litmus test. Bitcoin, on the other hand, has existed for seven years now, and the soundness of the fundamental protocol has proven worthy as a secure ledger, deserving as a store of value, effective as a peer-to-peer payment system, and perhaps emanating as the most significant extension of the Internet ever, a means to transact digital value without the need of a trusted third-party.

The Internet is a globally recognized, permission-less platform that has already transformed media, entertainment, commerce, education, and communications, and now promises to disintermediate trusted third-parties from the equation of storing and transmitting digital value. Why do banks insist on denying the evolution of the Internet—like some fundamentalists that deny the evolution of humankind? The easy answer is a single word, and all that it implies: death, death of one’s identity and personhood.

Nothing lasts forever, and present forms are finite and subject to the winds of change, in time being transformed beyond present recognition. Let the fact that banks and financial institutions are manifesting clear signs, indicative of the five stages of grieving, be fair warning: survival in the present form is not an option. A death-like transition is looming. The quicker banks can move through the process and accept their situation, the better they will fare. Ongoing life for financial institutions will require radical transformation, rebirth as a new creature, like a butterfly emerging from its chrysalis. The earth-bound bug must die, and to survive and thrive, a new future must be imagined in the age of free-range, decentralized, digital currency, not beholden to private blockchains, but roaming on the open plains of the global Internet. Will your financial institution accept and embrace the impending future—or languish in the earlier stages of dismissive denial, misplaced anger, protracted bargaining, and imminent depression? Consider this letter a warning siren of the coming storm. Now choose what you will do.

The Research Staff at CryptoIQ

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