Updated: May 15, 2020
Hype let its clients enter the Bitcoin Blockchain: they can now hold deposits and perform transaction with their own private key
By: Andrea Casetta and Emanuele Evangelisti
Bitcoin was not immune to the recent trends of uncertainty caused by the global COVID-19 pandemic. It was, however, able to recover quickly, unlike many other markets affected by severe backlash. The speed of the recovery has even brought anticipation for the prolonging of the cryptocurrency bull run. There are quite a few reasons that might explain this phenomenon. Starting from the renovated will of investors to find alternatives to traditional currencies in times of crisis, to ever-growing interests by individuals and businesses backed by the entrance of the financial institutions, Bitcoin seems set to for the mainstream.
The Italian Neobank Hype has recently launched a new feature that allows its regular clients access to the Bitcoin Blockchain, providing each of them with a private key and the possibility to engage in all sorts of transactions. This novelty has one particular goal: overcoming the great problem of adoption and usage of cryptocurrencies by a vast customer base. This new service reduces difficulty in finding effective and safe storage solutions and enabling adoption of this new medium. Now users no longer need to track their crypto transactions through an e-wallet, a vault guarding their digital keys.
By looking at data, it is vivid how the interest is increasing exponentially. In 2019, the number of mobile wallets was growing by 140 million users per year, with users spending an average of 1,1229 USD. China’s customer base is already using them in 36% of payments. Blockchain Wallets are no exception, as we now have 5 times as many as in early 2016.
Alternative crypto storage solution are hard to come by. Financial institutions, skeptical of non-canon currencies, are not willing to offer any type of solution. However, as the concept of banking is changing, many are starting to think that cryptos and the distributed ledger technology may have a crucial role in steering the financial sector into the future. During this lockdown, one of the most well known banking groups in Italy has become interested in the growing customer base and has decided to take the chance, potentially becoming the frontrunner in the industry. Sella Group, with a total clientele of 1.2 million, has launched a new feature, through its subsidiary, Hype, allowing customers access to the Bitcoin blockchain. The Milanese Startup Conio designed a fully-integrated wallet accessible from any Hype user’s personal account. Clients are now granted complete ownership of their very own Bitcoins: they can buy, sell, move and trade the biggest cryptocurrency through their existing banking application. In Italy, Bitcoin is currently ranked third among online payments and allowing users to use the currency with more ease is certainly an important step to climb the ranks. Naturally, the mole of Bitcoin held by citizens is bound to surge as well, adding increase in usage to the claims of it being the best safe-haven asset in time of uncertainty and of increasing deflationary expectations.
The feature launched by Hype is groundbreaking. It represents the landing of Bitcoin in Italian Commercial Banking. To analyze outcomes, implications, and potential benefits, we must separate the analysis into two perspectives.
First, let’s look at the scenario from a clients' perspective:
The bank’s clients are now just taps away to entering into the world of crypto. Access to the service is immediate, not requiring any additional form of KYC or identification. Adding to that, the trade-off between security and allowance to enter the market is eliminated. The difference between the service now offered through Hype and some of the competitors is the real access to the Bitcoin blockchain: tokens’ owners have now complete freedom over their usage. For example, it is possible to transfer them from a wallet to another outside the bank’s network, or the other way around (service never implemented by a bank-provided wallet, as a private key is not accessible by users). The downside of it is that mining fees apply, and are charged to the client. The added cost is balanced by the lowered transaction fee of just 1%, where the ones of competitors are as high as 5%.
It creates a new class of bank-offered services: with the target of meeting the need for tailored products, this introduction is a step forward. By adding the possibility to access the Bitcoin market simply through a regular account, Hype may see new clients coming in drawn by the opportunity. This is even more true these days, as the next Bitcoin Halving is bound to happen in the immediate future. The new wave of spotlights that are going to be directed toward the crypto will also shine upon the novel service. If this is what we will witness, many more institutions are going to follow Hype’s early-mover initiative.
Secondly, let’s analyze the immediate implications for Sella Group and the whole banking industry in terms of possible benefits brought by the Bitcoin blockchain:
The current market of cross-border payments, which totals around $600 billion annually, has some clear weaknesses. Fees range from 2 to 3 percent to as much as 10 percent in some cases and payment processing tends to be slow, with a wait of up to a few days. With the implementation of Blockchain and exchange of cryptocurrency assets, high fees and clunky execution problems could be solved. Payments would be settled in minutes instead of days and fees would decrease. McKinsey estimates that blockchain-based cross-border payments could save about $4 billion a year and boost transparency and security.
It is estimated that banks lose $15 billion to $20 billion annually from identity fraud, which happens when fraudsters use a false identity or somebody else’s identity details to support their criminal activities by obtaining goods or services through deception. Blockchain could be a solution for this huge problem. Users are assigned a digital fingerprint which is a unique identifier. The owner can therefore use it to prove his or her identity universally.
Additionally, it is possible to extend the analysis to a much longer timeframe. In this regard, we wanted to assess the potential of the usage of the distributed ledger technologies and cryptos, and the main challenges commercial banks will have to face. Seen from a client perspective, the 2019 “The Bank of the Future” Goldman Sachs’ report draws a picture of how clients’ needs will evolve. Taking from that, conjectures on what they will be and how they will intersect with Blockchain can be made. However we must also note some relevant obstacles for customers:
Trust; accessibility; and usability: the first is one of the main concerns potential clients may face. Even though the trust in tech is at its highest, many individuals may refrain from depositing their private keys in the hands of new institutions. The second regards the need to search for a trust-worthy web based crypto wallet and then setting up a new account that would require additional usernames and passwords. The very last one is the distress tokens holders deal with when asked what they could do with them. These three problems are all completely offset if respected financial institutions grant their clients the possibility of holding a Blockchain wallet the same way Hype does, giving them a huge early mover advantage. In 2018, the American Bankers Association estimated that 72% of users access bank accounts by web services or mobile. These same users would have to extend their trust in keeping their fiat currencies safe to crypto assets. It would be easier to do so to institutions with whom they have existing relationships. Being able to access the Bitcoin network through the same web page or app would be a game changer. And many, many more users and businesses could adopt the crypto ensuring much greater usability.
Personalized and differentiated products: as 80% of clients say to be more willing to business with firms that offer tailored service, a surge in need of new financial products that fit personal needs is behind the corner. Consumers will lean toward those banks that give a broader variety of products. With roughly 3 thousand different cryptocurrencies, those that will offer access to the majority of them will likely prevail. As of today, not even crypto wallets are that flexible, with many that grant access to only a limited number of cryptos.
Moving to an Institution perspective, it is clear that the challenges to be faced are many. Despite all the possible advantages that blockchain implementation could bring, we ought to analyse the main obstacles banks will face:
The transitions from an Individual to a Shared system would definitely be costly. We should consider not only hardware and software purchases needed to implement such a powerful technology, but also expenditures linked to maintenance, upgrades, hiring employees capable of using the new system and education of existing ones. In addition to these fixed costs, we have to mention the huge operating costs blockchain has. Both proof of stake and proof of work (the two most widely spread consensus mechanisms) need consistent cash outflows to finance their energy consumption. It is estimated that only Bitcoin transactions consume almost 75 Terawatt of electrical energy per year, which is comparable to the power consumption of Venezuela. Therefore, before moving on with the transition towards blockchain technology in banking, a thorough cost-benefit analysis should be carried out.
Firms may face practical challenges too. First and foremost, so far blockchain is lacking a proper legal framework. Many developed countries are currently trying to define this technology from a legal standpoint, which is necessary for its implementation. The fact that we can mathematically prove that data stored on a blockchain is valid and know who created and modified it, does not mean that blockchain-based-transactions or registration of ownership are legally binding. Another problem we identified is the difficulty to trust new technologies: banks should have to rely on a completely new system of data storage. As for the advent of internet and computers, many companies were initially reluctant and maintained traditional methods. We should also take into account whether banks would actually be willing to switch to a shared system. Data sharing is an alien concept to this industry, where ability to offer personalized services, confidentiality and competition are the core values. Furthermore, inefficiencies may surge as banks deal with enormous amount of data and products tailored to each client’s needs.
We firmly believe that Blockchain technology and the possibility to trade cryptos could bring crucial changes to the Banking industry. Faster and cheaper cross-border payments along with boosted security will improve money transfers; at the same time, it will be much easier for customers to access cryptocurrencies, with a new class of services that could reach the fast-changing needs of the clientele. Still, we should bear in mind the potential threats coming from implementation of the new technology. It is in the nearest future that Financial Institutions may open to cryptos, once seen as a utopia. The crisis and Bitcoin spotlights could push Fintech, especially, to take the chance.