The culture clash of cryptocurrencies

26^th March 2015

Toby Birch discusses how the whole financial ecosystem can benefit from digital currencies

The latest buzzwords on everyone’s lips is FinTech; the apparently effortless splicing of finance and technology into one expression. This seamless merger belies reality as the people working in the two industries are akin to oil and water when it comes to culture and terminology. There are a few rare individuals that have expertise in both fields, such as the UK Digital Currency Association’s (UKDCA) director Adam Cleary, who has worked in investment banks as well as digital currency start-ups.

My own background is in investment management, where I have a track record for financial forecasting, having published my book The Final Crash in 2007. Currencies and coins are more of a hobby than a career and as a self-professed IT idiot I can only claim expertise in the economic arena. What I can offer is an insight into how the financial establishment views alternative currencies.

Having dealt with regulators and service providers on this topic, the initial response is one of suspicion, apprehension and indecision. Financial folk are typically conservative and are driven by measurable outcomes such as transactions, profits and assets under management. Their day-to-day world revolves around data with quarterly and annual performance targets. There is little thought beyond the short-term; such is the instability of employment in the sector. For many, a career in finance is a fearful one with never-ending concerns over compliance, trading errors and job security.

When casually-dressed hipsters turn up talking evangelically about disruptive technology it is the last thing a besuited banker wants to hear; he or she does not wish to rock the boat and would rather cling to certainty. The two types have differently-wired brains. Technology is all about exponential activity and creative destruction. Banking is slow and linear like a utility company that gradually compounds earnings over time. I have some sympathy with the latter approach; if one has a sure thing then why spoil it. Likewise the old saying rings true that ‘the pioneers get the arrows while the settlers get the land’. First movers by necessity take extreme risks that seem reckless to others, and are rarely rewarded. Banks take the figurative view that it is better to supply the shovels and pan-handles to gold prospectors than end up knee-deep in mud.

Financial institutions need to be careful how they approach cryptocurrencies, not so much from a risk-weighted approach but from a protectionist one. Banks appear to be blocking alternative payment methods to protect their own interests. No one appears to have succeeded in opening a bank account for a bitcoin-related business in the UK. The counter-argument is that they have a considerable compliance and infrastructure costs to combat money laundering and terrorist financing. There is a suspicion that regulators are more interested in protecting themselves than the public, especially when lucrative careers rest on the maintenance of ‘stability’ and the status quo.

Internally, there is some debate among digital currency enthusiasts about engaging with authorities and seeking permission. One side takes the libertarian view that alternative currencies are the antithesis of the existing banking system and should carry on regardless. Why wait for an oil tanker to turn while the speed boat races away? The other side seeks engagement and education; inevitably the latter approach takes much longer and does not sit comfortably with exponentially-orientated entrepreneurs. Technology protagonists are more familiar with situations where capacity expands while costs contract, making gadgets and products ever-more accessible in a shorter space of time. Waiting round for committees and civil servants to debate and decide the future is enormously frustrating.

Perhaps the best analogy for alternative currencies comes from communications. People still pay to post letters and parcels while using e-mail for free. Large telecom companies likewise make money from calls and texts in spite of Skype being gratis. In future we will be able to choose between mainstream and alternative payment systems depending on which is suitable; the freedom to do so is the important factor, not the method. Developing countries will greatly benefit given that the cost of a standard bank transfer is far in excess of a day’s pay. The lowering of financial barriers will unleash a tide of entrepreneurial activity in such areas where much of the population is locked out of the payments process. The next big thing is the blockchain, the mechanism for making payments with multiple applications elsewhere, but this deserves another article in its own right.

The European Central Bank recently described digital currencies as inherently unstable. This smacks of pots and kettles given that the euro has recently plummeted in response to quantitative easing. The likes of bitcoin are still in their infancy and, like a small company stock, will remain volatile until they mature with greater trading volumes and wider acceptance. The overall message is that cryptocurrencies need not be feared, offering freedom of choice through evolution not revolution. They benefit the entire financial ecosystem so the big fish need not be afraid of the little minnows.

To find out more about Toby’s work, please visit his website.

For more information on the UKDCA, please visit their website. Follow them on Twitter @UK_DCA.