Banks around the world have been wrestling with the possibilities of Blockchain technology for a number of years, wondering how and if the new technology will disrupt the industry entirely, and not wanting to be left behind. Nothing has moved beyond proof of concept yet, but a polarisation is taking place between banks who support open blockchain networks and those who cling to closed systems that they control. This month Santander surprised them all with one of the most potentially impactful blockchain experiments to date.
In 2014 we learned that Standard Bank in South Africa was experimenting with Bitcoin accounts in a project that was subsequently halted. This year it emerged that several South African banks had joined a collaborative working group to experiment with inter-ledger technologies built on the Ethereum blockchain. Global bank consortiums are also looking at establishing their own blockchains to rival the open networks such as Bitcoin and Ethereum.
While interesting, and certainly offering better solutions than old school core banking systems, most of the experimentation thus far hasn’t shown much imagination or tackled the real problems, such as banking the unbanked or reducing fees, that blockchain could potentially solve. The Santander announcement, on the other hand, revealed a project to make blockchain interoperable with the conventional monetary system by having banknotes issued as tokens on the blockchain. It’s a simple idea that could have a massive impact.
The initiative was announced at the recent Ethereum Devcon 2 event in Shanghai by Ether.camp founder Roman Mandeleil and was later confirmed by representatives from Santander.
In an interview with blockchain news site Coindesk, Mandeleil said that the idea is to enable Santander customers to convert money from their bank accounts into a tokenised online currency that would be redeemable for paper money.
These tokens are backed by fiat money in Santander, and customers can exchange them for such at any time. Sort of like how banknotes could be exchanged for gold in the old days of the gold standard. Just in reverse… you get the idea.
If implemented, this move would open the traditional bank up to a range of new transactional capabilities that bridge the old world of banking with blockchain technologies. It would also be interesting to see the advantage to a bank like Santander if it became the first seamless gateway between fiat and cryptocurrency accounts without requiring complex exchange platforms and third-party disbursements.
Santander is also seeking to include other global banks in the project.
The big questions, as always, surround regulation. The rise of hybrid currencies such as in the Santander example presents another set of headaches for regulators that are already toiling with the rise of cryptocurrencies as such.
The ability of banks’ legal teams to make the case, and regulators to implement policies in time, will decide the success of such initiatives and with them the future relevance of traditional banks in a world where technologies can be built in a weekend that will take years to implement regulation for.