Emerging digital currency protocols have enormous potential to transform payments as we know them today. And with more time and more clarity, industry insiders believe that promise can manifest in digital banking and digital identities.
This was the subject of a day-long meeting hosted by US-based journal Foreign Affairs at the Council on Foreign Relations townhouse in New York on Thursday, during which three expert panels spoke in front of an assembly of bank and tech experts and enthusiasts.
Anne Shere Wallwork, a senior counselor for strategic policy at the US Department of the Treasury, said her organisation supports financial innovation and more efficient transfers to bring more people into the financial system – but that it needs companies in the ecosystem to comply with a certain set of standards.
There's no requirement to impose regulation on the bitcoin or Ripple protocols, she confirmed, but when anti-money laundering (AML) and counter-terrorist financing (CTF) controls apply or if there's a node engaging with the fiat system, there need to be protections in place.
The difficulty is in establishing standards.
"The Bank for International Settlements is concerned with all of these issues that, in this country, are dealt with more on a state-by-state basis," Wallwork said. "But, I think that probably there will be some push if this industry is to obtain trust and obtain greater traction and legitimacy. How are they going to meet those requirements?"
Access to the global banking system
To date, making cross-border payments has been slow, expensive and perhaps difficult relative to the alternative that digital currencies provide. Digital banking is becoming more common in the developed world, but it remains true elsewhere that sending money abroad requires that the recipient have access to a bank branch.
Karen Gifford is the chief compliance officer at Ripple Labs and has eight years' experience counseling and representing the New York Fed. She said smaller banks don't really have direct access to the exclusionary global financial system.
"Accessing that network [of banks] is expensive," she said. "It can cost $1m just to set up a correspondent account to have access to the global financial system with one of these correspondent banks."
Emerging technologies like the Ripple protocol, she said, offer a solution whereby banks can offer their clients correspondent banking services and be competitive with the bigger banks – faster and more affordably.
Advantageous as this is for US banks, she implied that a fragmented regulatory system could put off the impact of new technologies for a while, stating:
"Payments are the backbone of the financial system. We have a national economy. The idea that we are going to create a fragmented payments system by state just makes me sad."
"I think America should be one economy," she added.
Wallwork said that from an AML/CTF perspective, she agrees there's a need to have consistent standards nationally, and feels states recognize it as well.
There is a de-facto national standard, she said. Each state assumes the attitude that if a company complies with FinCEN's Banking Secrecy Act, it is compliant with the needs of the state.
However, she added: "On the one hand we did get rid of regional and state banking requirements, but we still have a system where banks are still regulated in part by the banking authorities and in part by states."
Rules-based, risk-based regulation
Gaining access to the banking system is also a major concern for emerging digital currency companies and startups.
These regulatory variations – at the state level and the level of the traditional financial system – present the next level of friction in the ecosystem, according to Brian Stoeckert, managing director of digital currency consulting firm CoinComply.
"Whether people want to believe this or not," he said, "if you're in the regulated financial services world of digital currency, you need – if you want to operate – a US bank account because you want to have ACH or wire transfers."
But companies are grappling with how to give confidence to regulators, bank authorities and customers; how to dispel fears around money laundering, security and fraud; how to reassure all parties that they won't become victims of events like the ones that brought bitcoin into the limelight.
"You need to address those risks, you need to have consumer confidence," said John Beccia, general counsel and chief compliance officer at digital money platform Circle Internet Financial. "People need to feel that this is another legitimate payments vehicle and so you need to have that [regulation] in place."
He added that Circle does full KYC procedures, venturing that it might even do more than traditional banks. It looks at IP addresses, geo-location, document validation, visual recognition – a technology company can build its KYC system from the ground up, without having to work with legacy systems.
This is an industry where new companies seem to sprout up daily. Stoeckert said the market demand for engagement is significant, and that although there is a lack of faith in trustful companies, there is an increasing number of them putting consumers at ease.
"Is that going to push the traditional financial institutions to try and keep up? I absolutely think so. I think they're going to be in a hard position to do that," he said.
"The more we hear about these privacy data leaks and cybersecurity aspects, I wonder if that's going to be the backend to more digital currency-based methods […] Maybe there's going to come a time where people don't want to be able to turn over that much information for day-to-day purchases, and that may end up being a use case for it."
Digital identity and financial autonomy
Millennials are a highly digital demographic moving the payments industry of the developed world. They are 20 to 35 years old, 52% of them have used mobile payments and 18% expect to use digital currencies on a weekly basis by 2020.
"[They're] looking at the technology, growing up in technology, [there's] very minimal use of the traditional financial system right now," Stoeckert said. "They get paid in ACH, they utilize and transfer money through mobile devices, they share rides, they share apartments – the sharing mechanism is a key component that we're looking at."
But in the developing world that doesn't have access to the global banking system and where individuals might not have access to banking services, digital identity is the heart of the matter.
Lack of identity is precisely the issue with the so-called "unbanked", said Michael Casey, a Wall Street Journal global finance senior columnist and co-author of The Age of Cryptocurrency. He argues that there is enormous economic power in giving people their identity and creditworthiness.
"Whether or not they have the documents themselves there's just no way to prove who you are. You can own your land but you can't mortgage it and turn it into an asset as we can, and that just retards growth."
"If we build identities around these alternative measures," he added, "the concern is always that the centralized figure – whether it's Google or PayPal – owns your information."
It was perhaps Casey that spoke most directly to the abilities of bitcoin to influence the global financial system, adding:
"This is where the blockchain comes in: Give people the power to recognize that they can withhold certain information because they can control it."
Images via Tanaya Macheel for CoinDesk