TOP GLOBAL FINANCIAL INSTITUTIONS WILL INVEST MORE THAN $1BN IN BLOCKCHAIN-RELATED PROJECTS IN THE NEXT 1-2 YEARS
⎯ Bitcoin set to defy sceptics and become 6th largest global reserve currency by 2030, according to research
⎯ More than 1 million bitcoin transactions alone are now taking place daily, in excess of 10 times publicly reported data
⎯ Survey by Magister Advisors of more than 30 leading bitcoin companies demonstrates growing strategic significance of bitcoin and blockchain
⎯ Leading banks each already have 10-20 blockchain projects underway
⎯ China already has hegemony in bitcoin ‘mining’, the process that validates payment
A global survey of financial businesses focused on blockchain and bitcoin technology has found that an estimated $1 billion will be spent by the top 100 financial institutions on blockchain-related projects over the next 24 months. The view of the majority of respondents is also that bitcoin will become the 6th largest global reserve currency within 15 years. In the the largest study of its type to date, Magister Advisors, M&A advisors to the technology industry, interviewed senior executives from thirty of the world’s leading bitcoin companies.
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Jeremy Millar, partner at Magister Advisors who led the research said: “Blockchain is without question the most significant advancement in enterprise IT in a decade, on a par with big data and machine learning. What JAVA is to the Internet, blockchain is to financial services. We have now reached a fork in the road with bitcoin and blockchain. Bitcoin has proven itself as an established currency. Blockchain, more fundamentally, will become the default global standard distributed ledger for financial transactions.”
BANKS WILL SPEND $1BN ON BLOCKCHAIN INNOVATION IN THE NEXT TWO YEARS
Magister Advisors estimates that the top 100 global financial institutions will invest more than $1bn on bitcoin and blockchain related projects over the next 12-24 months. The same research has found that leading banks have portfolios of 10-20 bitcoin-related projects underway. The initial use of blockchain is typically not to replace core infrastructure, such as wire transfers, but to complement it, often by storing ‘meta-data’ in areas such as settlement and clearing. But the potential is much greater, given the flexibility and robustness of the technology, ranging from property registries to security infrastructure to direct payments.
Magister’s research finds that leading private blockchain companies are already signing seven figure contracts with these institutions. A number of projects are ‘near production’, having been proven internally to be sufficiently robust for to satisfy production requirements.
Jeremy Millar, partner at Magister Advisors who led the research, said: “Banks will initially be unwilling to remove the core infrastructure that handles the process of clearance and settlement but they will increasingly run parallel blockchain processes, evidence by the spike in investment that our poll has identified. Blockchain is not a flash in the pan. The transparency of its processes and its array of potential applications make it virtually inevitable that it will become the default validation standard.”
He added: “Blockchain technology will underpin a growing number of routine transactions globally as trust grows. Our interviews with thirty of the leading bitcoin companies worldwide cement our view that the currency is gaining traction. Growing vendor acceptance and the adoption of bitcoin in developing markets are creating a pincer movement that will lead to widespread business and consumer acceptance and adoption over time.”
BITCOIN AND SPECULATION
Like many assets, such as futures and commodities, the primary usage of Bitcoin today in developed markets is speculation. Interest in Bitcoin speculation has been enhanced by the lack of volatility and yield in traditional asset classes (much like gold a few years ago), leading to the creation of a number of Bitcoin ‘money market funds’ or ETF equivalents. Magister Advisors estimates that 90% of Bitcoin by value is being held for speculation, not commercial transactions. On the other hand, we estimate that 90% of Bitcoin transactions by volume are in fact commercial transactions, typically in developing economies.
Jeremy Millar said: “It is worth noting that futures trading volumes are three times or more the volumes on stock exchanges. Traders are addicted to volatility and we mustn’t underestimate the significance of speculation.”
BLOCKCHAIN AND BITCOIN WILL DIVERGE
To date, blockchain and bitcoin have captured equal attention but blockchain is set to impact far wider aspects of business and consumer life. The majority of bitcoin transactions are currently taking place in developing economies, reflecting the appeal of the robustness of the technology in economies where an estimated 2 billion adults do not have bank accounts and especially in markets where corruption is endemic in financial services.
Jeremy Millar said: “Two million smartphones are being activated per day, so the question arises in developing economies, especially those where corruption is a factor, why open a bank account?”
REGULATION BY INNOVATION
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Companies such as Coinanalysis and Elliptic are focused on tracing the source of Bitcoin transactions for proceeds of crime and anti-money laundering. Indeed, the arrest of DEA agent Carl Force and Secret Service special agent Shaun Bridges in part relied on suspicious activity reports filed by Bitcoin exchanges such as Bitstamp.
Jeremy Millar said: “Ironically bitcoin has attracted negative publicity over its short life because attempts to rig it have been flagged by the blockchain technology that underpins it. It’s the inherent ability of the blockchain infrastructure to expose these attempts that have impacted perceptions when in fact it should shore them up. Studies, conversely, show that 80% of UK banknotes feature traces of drugs. This self-regulating capability in blockchain will lend itself to array of applications where corruption has hitherto been a problem.”
BITCOIN TRANSACTION NUMBERS ARE UNDERREPORTED BY AN ORDER OF MAGNITUDE
Reported data from blockchain.info indicates that there are circa 120,000 bitcoin transactions per day, but this under-reports the actual total, according Magister Advisors’ research.
“Reported numbers do not factor in the 300,000 daily ‘off-chain’ transactions by large wallet/vault players such as Coinbase, Circle and Xapo, pushing the daily total number of transactions to around 1 million,” said Jeremy Millar.
DEVELOPING MARKETS MAY ACCELERATE GLOBAL ADOPTION
Within certain markets, bitcoin as a currency is extremely popular, finding applications where financial institutions have a smaller footprint. In some of the large wallets, for example, 90% of the transactions are occurring in developing markets. There are also a number of significant bitcoin remittance companies such as Abra, Bitpesa and Atlas.
Bitcoin for cross-currency payroll is also increasingly popular.
Jeremy Millar said: “There are three drivers that are accelerating adoption of bitcoin: the maturity of the technology, the range of potential applications and the move from proof-of-concept to production. The early years of public exposure to bitcoin was confined to stunts, such as acceptance of the currency for space tourism bookings and one-off cashpoints. Now we see vendors like Microsoft, Dell – and mature online consumer finance businesses like PayPal accepting the currency. It is still, however, effectively hobbyist. No compelling consumer user case exists in developed economies. Consumer and SME transactions in developing markets, on the other hand, will drive commercialisation.”
These factors, combined with growing acceptance by, and investment from the big banks, are accelerating bitcoin’s progression up the credibility curve.
In certain markets, bitcoin as a currency is extremely popular. Within some of the large wallets, for example, 90% of the transactions occur in developing markets where an estimated 2 billion adults do not have a conventional bank account. The robustness of blockchain’s security makes it an appealing alternative for those disenfranchised from the traditional banking system.
CHINA’S GROWING ROLE
One notable additional factor is the growth of China’s involvement in blockchain, the underpinning encryption technology. More than half of ‘hashrate distribution’, a feature that validates the shared ledger and enables payment is carried out by Chinese ‘miners’.
Commentators identifying this as a risk to the robustness of blockchain are misguided in Magister Advisors’ view.
Jeremy Millar said: “Chinese miners are making a reported $150 million a year in aggregate and the technology is designed to expose attempts at malfeasance. Fundamentally, even if there was a desire to do so, there is no incentive to cheat.”