Insight & Analysis

TT’s 25th anniversary: Bitcoin, blockchain, DLT and beyond

Published: Jul 2023

When Bitcoin first burst onto the scene there were predictions that banks – and central banks – would be disintermediated and would no longer be necessary. Since then, however, financial institutions have absorbed the underlying blockchain technology to make their services more efficient, rather than doing away with them altogether.

Few innovations are truly disruptive but when Bitcoin burst onto the scene, it presented a new business model – one that cut out intermediaries and threatened to put many out of business. The 2008 ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ whitepaper by the pseudonymous Satoshi Nakamoto was a watershed moment for the financial services industry. Bitcoin did away with the need for central banks to issue currency, and also removed the need for banks to sit in the middle of transactions and keep a ledger. Instead, a distributed network would authorise the payments and keep an open and shared ledger for all to see.

Initially, Bitcoin was a niche endeavour favoured by computer geeks and anarchists who sought to disrupt the financial system, which came at a time – at the peak of the financial crisis – when trust in traditional institutions was at an all-time low. The cryptocurrency, however, quickly gained a reputation for being associated with illicit activities and paying for goods – and services – on the online black-market Silk Road, for example. But those who had mined Bitcoin early on – by getting their computers to solve a complex cryptographic problem – soon found that the currency increased in value. From there, interest grew in the currency as an investment as it became clear massive gains could be had from buying and selling at the right time.

For corporates, Bitcoin – and other cryptocurrencies – represent an alternative investment and offers a hedge against inflation. Because of the volatility, and the regulatory uncertainty, however, many corporate treasuries have shied away from such investments and the community is divided into crypto believers and sceptics. When crypto scandals have hit, such as the collapse of TerraUSD and FTX, it has confirmed the view that treasurers already had about crypto.

Much of the focus has been on Bitcoin and crypto as a currency, one that is speculated on for its value. As one author writes, the focus should be on the model it provides for trust rather than volatility.

This focus on trust represents the shift that occurred in the financial services industry, as many began to recognise the benefits of Bitcoin’s underlying blockchain technology. The discussions soon moved from Bitcoin, to blockchain and then to distributed ledger technology (DLT). At Sibos – the annual conference for the SWIFT payment community and the financial services industry – the conversation moved from Bitcoin to being a fringe interest, to blockchain being something the fintechs were working with, and then banks realising they needed to take the technology seriously. From there came pilots, such as Wells Fargo’s and ANZ’s use of DLT to overcome the inefficiencies in correspondent banking, a trial that was then expanded by SWIFT.

With DLT potentially disintermediating financial institutions – as there is no need for a middleman (or woman) – there has been talk of the demise of SWIFT in favour of other solutions that offer a more efficient service. However, SWIFT has a community of financial institutions, as well as standards and the ability to scale on its side. SWIFT has embraced DLT and has staked a claim on its digital future. Rather than DLT making SWIFT obsolete, its trials in this space have shown it is keeping ahead of the latest trends by positioning itself as the connector and bridge for the financial infrastructure, and that central bank digital currencies and tokenised assets can be used cross-border on the existing infrastructure. SWIFT has demonstrated it is possible to continuously innovate without completely reinventing the wheel. Rather than Bitcoin, blockchain and DLT threatening to displace financial institutions, they have been absorbing these technologies into their organisations to improve the way things are already done.

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