The banks are being turned around like the car industry

Let’s talk about the implications for the financial industry. The US investment bank Goldman Sachs recently published the first analysis on the development of the Bitcoin price. For a long time, private banks touched the topic with pointed fingers.


banks & bitcoinThe topic of cryptocurrencies and blockchain came out of nowhere. There are a lot of different services like available, that make banks unnecessary in the future.

The banks ignored it for a long time, partly because it was brought to the attention of management from the IT departments. And, as we all know, that’s where business economists sit. In part, there was a lack of understanding for IT and digitization at work, and a lack of courage. Large companies are cumbersome tankers.

That’s a typical problem in innovation research, that people don’t think outside the box. New developments are ridiculed until they can no longer be ignored. And then you are taken by cold surprise. Take the example of the German automotive industry: It largely ignored the issue of electromobility until it could no longer do so. Now it has to counteract it all the more quickly. Blockchain technology will turn the financial sector upside down like electric drive did the auto industry.

Of course, there are also banks in Germany that are addressing the issue earlier than others. At, dozens of people are working on the topic, something is happening. Even if it has to be said that other countries – South Korea, the USA, Switzerland – are already further ahead. Financial institutions and the financial departments of large corporations should get to grips with Bitcoin and blockchain, if only because they present completely new opportunities – but also major risks for the old business model.

What risks are we talking about here?

Bitcoin is leading to the comprehensive digitization of administration. Booking processes, checking ownership, classic case processing – all’ this could be digitized by blockchain technology. In the medium term, this will also have negative consequences for employees in the administrative departments.

You can’t make that sweeping statement, but I believe that a great many processes could be handled by a reliable IT database, if not tomorrow, then the day after tomorrow. And this applies not only to banks, insurers and the financial departments of corporations, but also to government administration. Blockchain technology then helps to reduce costs and thus prices here. In the financial sector, many jobs are certainly threatened here, as numerous processes could be handled by IT.

But most banks have recognized the challenge, are modernizing their IT, and are positioning themselves digitally? At first glance, banks are actually doing a lot in the area of digitization. Every second bank has founded an incubator, a start-up office for fresh, digital ideas. However, I have the impression that all too often only sales issues are addressed there: New banking apps are developed, insurance for groups of friends, voucher programs. But the core activity should also be the subject of digital transformation.

One example, please.

A good example is the new cooperation between Daimler and Landesbank Baden-Württemberg. Daimler, like many corporations, uses promissory note loans for debt financing. Until now, issuing and managing them has been a never-ending paper exercise, especially when the ownership rights to the piecemeal loans change. LBBW has now settled a promissory note loan with Daimler for the first time using its own blockchain, with a volume of 100 million euros. I find it remarkable that here a – excuse me – brittle Landesbank, which is not really known for innovation, is operating at the very forefront of the German financial world. One wonders why such pilot projects are not being driven forward by other industry giants.

So it’s not bitcoin that’s changing the financial world, but blockchain, the distributed, tamper-proof database? The two are related. Bitcoin and other cryptocurrencies will change the world. But far more powerful is the technology in the background. It can help open up a country’s real estate market, for example. So far, investment funds and billionaire investors from the Arab world, Russia and China often invest in real estate across borders. But with a cryptocurrency, it would be possible for many small investors to get together and invest in a property here in Germany, for example. They could organize the financing round in a cryptocurrency, buy shares and thus transfer the money to Germany as well. Currently, the administrative effort is far too high and too expensive for, say, a South Korean investor to invest in the German real estate market. With cryptocurrencies and blockchain technology, this would be possible.

cryptocurrencies and blockchain

The vision of real online money

Bitcoin is now changing just that. Because Bitcoin is based on the radical concept that banks and other established payment service providers are no longer absolutely necessary to send money from A to B in the digital age. Instead, the Internet itself is to be made usable as a globally available financial infrastructure. This should enable true online banking in an increasingly networked society. In other words, transactions that are processed immediately and directly on the Internet. Not only between people, but also between machines.

If this succeeds, it will open up a host of new possibilities. From fast and cheap foreign transfers to efficient micro and nano transactions, for example for fair and automatic remuneration of consumed online content. In the future, Bitcoin may even become a fundamental building block of the Internet of Things, in which billions of devices interact autonomously with each other via a blockchain – including financially.

Two things are necessary for this: another protocol in the network, similar to the Hypertext Transfer Protocol (HTTP), and a digital money medium managed by this protocol, which itself possesses the most important characteristics and ideals of the network: available around the clock, independent of states and borders, free of censorship, inexpensive, machine-readable, open and as accessible as possible to everyone.

Digital currencies are still in their infancy

Bitcoin is both protocol and medium, and the fact that it exists at all is no small feat. For as pretty as the idea sounds, history shows that it is by no means trivial to successfully implement such a stateless and bankless Internet money. IT experts, economists and idealists have been trying for decades. But they have failed time and again for various reasons: legal framework conditions, technical difficulties, flaws in the concept, lack of acceptance or political pressure.

However, the fact that there would eventually be a functioning Internet money was ultimately inevitable. In 1999, Milton Friedman, winner of the Nobel Prize for Economics, described his vision of a future “e-cash.” Interestingly, his descriptions from back then coincide in a surprising number of ways with what Bitcoin is today. What sets Bitcoin apart from all previous e-cash attempts, however: It works. True, Bitcoins have been stolen again and again, even in large quantities. But in eight years, no one has managed to hack the Bitcoin protocol. This is in stark contrast to the payment networks of banks.

Nevertheless, the Bitcoin experiment is still in its infancy and is currently far from achieving the status of a money medium suitable for mass and everyday use. The concept of pure Internet money is still too unfamiliar for many people. But the networked society’s need for money that can be sent as quickly and easily as an e-mail continues to grow. Bitcoin has a good chance of becoming this money at some point.