06 Oct 2015

Australia’s banks keep an eye on Bitcoin

Why everyone in fintech is talking about the blockchain?

If you’ve been following the financial technology (fintech) sector of late you might have seen references to blockchain technology.

The blockchain is a central ledger of Bitcoin transactions. Many banks are trying to find a way to harness the technology to “introduce trust and transparency to any online transaction”.

One of the key projects in this space that involves Australian and international banks is the R3 Consortium, whose existence was first revealed last month.

The Commonwealth Bank of Australia was the first local bank to join R3. A fortnight later it was revealed that National Australia Bank has also joined the initiative.

R3’s Chief Technology Officer Richard Brown, who joined the company last month from IBM, told Reuters the technology could bring banks significant savings by making their systems more efficient and transparent, with less risk of error.

“Over decades banks and other firms have built systems for themselves … and then a collection of processes has emerged between the banks … to make sure these systems are kept synchronised and are reconciled with each other,” R3’s CTO Richard Brown told Reuters.

“With shared or distributed ledgers perhaps we can imagine a world where participants share this infrastructure, so rather than everyone running their own systems that have to be reconciled, we can have … an open platform that multiple firms can connect to.”

It isn’t just the major retail banks that are interested in the blockchain’s potential – central banks are also taking notice.

While the Reserve Bank of Australia (RBA) is watching and waiting, their counterparts in the United Kingdom are taking a more active, hands-on approach.

“What I think is now reasonably clear is that the distributed payment technology embodied in bitcoin has real potential,” Bank of England chief economist Andrew Haldane said in a recent speech.

“Bitcoin’s ‘blockchain’ technology appears to offer an imaginative solution to that distributed trust problem.

“Whether a variant of this technology could support central bank-issued digital currency is very much an open question.

“Central bank-issued digital currency raises big logistical and behavioural questions too. How practically would it work? What security and privacy risks would it raise? And how would public and privately-issued monies interact?

“These questions do not have easy answers.”

In addition to being interested in the underlying technology, some banks are also keeping close tabs on the potential of Bitcoin itself.

In June this year, Reinventure – a venture capital firm whose largest financial backer is Westpac – took an undisclosed stake in Bitcoin wallet service Coinbase, ostensibly to understand how its business model works.

Others like CBA, Westpac and ANZ are testing the capabilities of Ripple, an open source currency exchange.