Bitcoin, blockchain and banking: the “ValueWeb”

Paul Kennedy, principal, Kennedy Management Partners
Paul Kennedy, principal, Kennedy Management Partners

As former president of IDC Canada and marketing director with the Canada Systems Group, reviewer Paul Kennedy has long term experience with both technology and organizational structures, which allows him to provide a unique perspective on management issues. In his thoughts on “ValueWeb,” he offers a seasoned view on the interplay between tech innovation and business requirements. Paul now heads up Kennedy Management Partners, a Toronto-based boutique consulting firm that advises technology-focused companies. (ed.)

A review by Paul Kennedy

“ValueWeb: how FinTech firms are using mobile and blockchain technologies to create the Internet of Value”

By Chris Skinner, author of “Digital Bank”

Published 2016 by Marshall Cavendish Business

424 pages, Hardcover ($40.60 Cdn.) and Kindle ($16.81 Cdn.)

 

This is a book for now: it could not have been written a year ago, and it will be obsolete a year from now. Indeed, Chris Skinner wrote the prequel to this book just two years ago, “Digital Bank: Strategies to succeed as a digital bank,” and I’ll wager the sequel to this book is being written right now. The author is ideally positioned to provide these snapshots of the rapidly changing world of banking. He heads the Financial Services Club, a UK-based network for financial professionals that he founded in 2004.to provide research, analysis, commentary and debate on the future of financial services.

In his written work, Skinner describes several battles that are under way in the banking space, with no firm opinion on when the war will end. One battle is within traditional large banks, which are wrestling with how to fight off FinTech (financial technology) startups (upstarts) that nibble at the edges of their businesses. One way the large banks are fighting back is by acquiring the promising small firms, and “wrapping” them around existing services. The author predicts failure for this approach. He predicts more success for “replacement,” using newly acquired firms in a more strategic way: and most success for a “reform” approach involving a completely new vision for the bank. One can imagine why bank executives might find this prospect daunting: Skinner forecasts that the new vision will entail banks never seeing customers face-to-face, and making no money on loans, but finding new unconventional ways of obtaining revenues.

Another of Skinner’s documented battles is between governments and the creators of cyber currencies like Bitcoin. The latter are libertarians (some might say anarchists) who want no role for governments in the creation of the currencies for the Internet. Skinner comes down strongly on the opposite side, arguing that in unregulated and under-the-radar economies, consumers cannot be protected, and governments cannot levy taxes. The governments/regulators will win that war, but the skirmishes continue.

ValueWebThis cyber currency war originated in a very strange way. In November 2008, a paper appeared in a cryptography blog describing the “bitcoin” digital currency, and a related technology, “blockchain,” the online ledger system that keeps track of bitcoin transactions. The paper was credited to Satoshi Nakamoto, but since then no one has seen him or knows his true identity. Within a year of the article’s appearance, the first bitcoin software was released and the first transactions completed. The system grew in popularity, but only among cyber-finance nerds, to the point where bitcoin trading exchanges emerged, and the Chinese government took interest. The dollar value of a bitcoin fluctuated wildly. Then, in 2014, the largest of these exchanges, Mt. Gox, suspended trading and closed its website. Liquidation proceedings in Japan disclosed that 850,000 bitcoins (valued at $450 million at the time) were missing, likely stolen. One would have thought such a scandal would have killed the bitcoin institution – but it survives, mostly because of the widely recognized merits of the blockchain concept.

The concept is not ready for retail/consumer use, but most major central banks worldwide are conducting studies and trials for interbank payments using the distributed ledger. Indeed The Bank of Canada announced Project Jasper just a month ago. Perhaps Chris Skinner will mention it in his next book. But perhaps not, for this book is very Euro-centric. There are some mentions of initiatives in Africa, the Far East and among major US banks, but the vast majority of references are to Europe and the UK.

In the body of the book, Chris Skinner speaks to senior bankers, describing the coming seismic shifts to their industry from mobile and the Internet. He builds on a message we’ve read and heard elsewhere: that we’re entering the Third Generation of the Internet. The first (1.0) was the Internet of Business born in 1971, the second (2.0) the Internet of Society (born in 1992 with the first instant message). Internet 3.0 he labels The Internet of Value (or the ValueWeb of the title). If banking executives are not creating and executing a new vision for their institutions, one anchored in the customers’ needs and wants, and built from the core out on digital information stores in the cloud, and connectivity through social media to all touch-points, they are toast.

The author concludes this section speculatively, describing Internet 4.0 as The Internet of Life, and quoting the legendary Ray Kurzweil as saying that “Computers will be better than humans at performing most tasks by 2029.” The Internet of Things will have taken over, and machine-to-machine transactions involving cyber currencies and something like the blockchain will be pervasive.

Chris Skinner, author, ValueWeb
Chris Skinner, author, ValueWeb

The last 40 percent of the book consists of interviews with nineteen prominent people in the “New Financial World” (diversity alert: 1 female!). This section shows off Chris Skinner’s broad and representative international contacts. He refers to the interviews as “Case Studies” and highlights what each interviewee’s firm is doing. His interviewing skills bring out the different ways each subject views the financial universe, views that are often influenced by the way banking is regulated in each country. This part of the book is easier to read than the first part – it is more conversational, and the business models and market perspectives described are truly eye-opening. The first half-dozen interviews are with players in “The Bitcoin Debate” including past and present heads of the Bitcoin Foundation. The next five are with leaders of FinTech Startups from around the world, with the head of Klarna (Sweden) being most interesting. A set of seven CEOs of Bank Startups, who are almost all from around Europe, highlighted by Fidor (Germany) follow. One final interview is with Kosta Peric, the Gates Foundation executive who oversees Financial Services for the Poor. The story of M-PESA in Kenya, and how it has linked mobile phones to electronic wallets, is well worth reading.

A puzzling aspect of the book is the presence throughout of dozens of complex charts and graphs, all un-numbered, most unreferenced in the text, and most illegible. They strike me as the dumped contents of consultant Skinner’s PowerPoint slide deck. One wonders why they are there: more rigorous editing would have solved this, and might have reduced the book’s length by 10 percent or more.

If you are a senior banker currently agonizing over how new technologies will impact your institution, read this book. If you can wait a year or two (Skinner guesses that each Internet Generation lasts 15 years +/- 5), then there will be another more current one, same subject, same author.

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