In April, Bitcoin Magazinereported that BBVA, one of Spain’s major banks, was among the sponsors of the Digital Currency Summit in Madrid.
Banco Bilbao Vizcaya Argentaria (BBVA), the second largest bank in Spain after Santander, is recognized within the industry for being more pro-technology than many of its competitors.
“Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter a highly regulated, low-margin business such as banking,” BBVA Executive Chairman Francisco González told The Financial Times in 2014. “I disagree. What is more, I think banks that are not prepared for such new competitors face certain death.”
With this forward-looking attitude, it’s not surprising that BBVA is interested in the blockchain. In 2013 BBVA Research, a BBVA department that “adapts economic research to the needs of a banking group with a growing international presence in order to respond to the challenge of evaluating increasingly globalized developments,” published a paper titled “Bitcoin: A Chapter in Digital Currency Adoption.” The conclusions of the 2013 paper were similar to González’ remarks in 2014:
“Tech giants could develop processing capacity and become clearing houses of digital currency either on their own or through joint ventures with financial institutions. It’s only a matter of time before new models of digital currency become mainstream. The massive adoption of digital currency opens the door to new and different competitors in the financial system. Therefore, financial institutions and regulators who understand and eventually embrace the digital currency are most likely to lead the new digital monetary system.”
BBVA Research recently published a new paper titled “Blockchain Technology: The Ultimate Disruption in the Financial System.” The new paper opens with a surprisingly strong (coming from a major financial institution) quote of libertarian economist Friedrich Hayek.
The paper notes that financial institutions were initially slow to recognize the potential of the blockchain. However, two years after the publication of the first paper, dozens of large banks have now invested in the blockchain technology because they have understood its most evident advantages: fast and relatively cheap payments and the possibility of cost-effective infrastructures.
“The attention is likely the result of how disruptive this technology is to the financial sector, particularly if it allows massive simplification of banking processes and significantly reduces costs,” the paper reads.
Recently, Santander Innoventures, the innovation arm of Santander, suggested blockchain technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15 billion and $20 billion per year by 2022.
The BBVA paper mentions the new “Bitcoin 2.0” systems characterized by the possibility of “smart contracts” enforced by complex algorithms that operate autonomously in distributed platforms without a centralized register, thereby increasing efficiency. “In this environment, the current system where financial institutions record individual’s accounts in a centralized fashion and the bank’s reserves are stored by the central bank (i.e. Federal Reserve) would be replaced by the ‘Internet of money’ or the ‘Internet of finance’ – a fully decentralized financial system.”
There are, of course, challenges and possible roadblocks. In particular, new fintech systems need to comply with legal and regulatory demands. Also, blockchain systems can have significant energy costs and still be vulnerable to some types of attacks like traditional systems.
“Nonetheless, improvements and modifications in blockchain technology could overcome some of these obstacles and lead to broader acceptance,” concludes the BBVA paper. “Therefore, the key question is not how, but when the disruption will become far-reaching. As other industries that have been transformed by new technologies and digitization, blockchain technology could reshape the financial industry well beyond the payments system.”