Postfinance, UBS and others indirectly admit that the blockchain technology developed by the crypto industry is superior to their own IT, which is considered hopelessly outdated.
High-performance computers for mining cryptocurrencies.
Lars Hagberg / AFP
Behind the dry press release lies a remarkable admission: This week, Swiss banks indirectly admitted that their business processes and IT systems are outdated. And that they are instead evaluating a technology that was developed in a clandestine financial system: the obscure crypto industry.
Blockchain protocols allow anyone with an internet connection to open their own accounts, invest money 24/7, and send it worldwide. Or take out and grant loans. All without having to fill out a single form or ask anyone for permission to make a transaction.
The new gold standard
Previously, it had already become apparent on the investment side that blockchain technology would likely become the new gold standard: because large asset managers such as Blackrock have begun to digitize traditional investments such as bonds.
But first things first: The banking industry association announced on Wednesday that its members Postfinance, UBS and Sygnum “are signing a letter of intent under the umbrella of the Swiss Bankers Association to examine a Swiss franc book money token.”
Translated, this means: The three banks are testing, on behalf of the entire industry, whether they can put their customers’ account balances on the blockchain. Book money is at the heart of the banks’ business activities.
Radical plans
Digitizing this is a much more radical step than when cantonal banks allow their customers to invest in Bitcoin and the like. It is more about banks using the technology behind such protocols for themselves. Or building services on a public blockchain such as Ethereum.
“As far as I know, book money has never been issued directly on a blockchain before. This is very innovative on the part of the Swiss banks involved,” says Remo Nyffenegger, an economics researcher at the University of Basel. “However, this is a complex feasibility study because the regulatory framework must first be defined.” In particular, there is a need for clarity on whether book value tokens can also be used abroad and how much they must be backed by assets.
“If the banks were to opt for a public blockchain – an option they mentioned in their white paper – it would actually be revolutionary: because on public blockchains, transactions are basically visible to everyone,” says Nyffenegger.
Other experts also think the banks’ move is the right one: “The National Bank does not want to introduce a digital franc for retail customers because it would have to fear that global demand for francs and thus the exchange rate would rise. It is therefore very welcome that the previously hesitant commercial banks are now moving,” says Daniel Diemers, blockchain expert and venture capitalist.
Outdated banking IT systems
However, he also sees greater challenges ahead for the mostly somewhat cumbersome institutes: “It will be a challenge for many to now integrate a blockchain stack into their IT systems that have grown over decades.”
Stefan Grasmann agrees. He is head of blockchain at the innovation developer Zühlke: “It is undisputed among experts that the banks’ IT systems are hopelessly outdated. For example, they are based on the logic that there are no more transactions after 6 p.m. and that the day’s transactions can then be processed.” In the blockchain world, however, the financial markets are open 24 hours a day, 7 days a week.
Because the banking industry and the decentralized financial system on the blockchain are fundamentally different, experts are wondering how many advantages will remain when the two worlds merge: whether the heavily regulated banking world with its high fees will prevail or the crypto world, where users largely have control over their own money.
Finma recently snubbed the industry when it issued extremely strict rules for digital currencies, also known as stablecoins, on its own initiative. The comprehensive identification of all users of digital currencies required by Finma has no discernible legal basis, criticized the industry association Swiss Blockchain Federation. These requirements make it impossible for Swiss issuers to issue competitive stablecoins.
Are the banks or the customers protected?
A comprehensive check on who is using a digital currency and how, in order to be able to identify possible money laundering cases, certainly does not meet a customer need. And it is a bad omen for what could happen to the decentralized financial world if overly cautious authorities come forward with maximum demands.
“The specific rules will show who the regulators really want to protect: the banks or the end customers,” says Stefan Grasmann. It will also become clear whether banks will try to conduct business on private blockchains that they control – instead of relying on public ones in whose development anyone can participate. The asset manager Blackrock has opted for Ethereum, and Swiss banks are also considering public blockchains.
Apart from these questions, insiders are more pleased that things are apparently moving forward with the digital franc, which would be a versatile programmable currency. “The book money token is an important step for banks to become fit for the future,” says Daniel Diemers.
But he personally finds the applications that a digital franc enables much more exciting. “We are investing in drone highways, for example. If machines pay for the use of an infrastructure such as an air corridor, the transaction will of course not be made by credit card. This requires tokens,” says Diemers.
Even competitors applaud
Even the Swiss Stablecoin company is pleased – although its own plans for a digital franc may face competition from the Bankers Association’s initiative. “We very much welcome the fact that the banks are considering a book money token,” says Christian Bieri, Managing Director of Swiss Stablecoin.
“Our aim is to offer the Swiss economy and population a widely accessible digital franc as a means of payment. To do this, we rely on cooperation with banks and are therefore dependent on them engaging intensively with the technology,” says Bieri. They do not see themselves as competitors, but can imagine many synergies.
