Cryptocurrency Technology Set to Shake Up Correspondent Banking
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If banks can't beat cryptocurrencies, they might as well join them.
That seemed to be the consensus at a Tuesday panel on correspondent banking sponsored by The Society for Worldwide Interbank Financial Telecommunication.
The multistep correspondent-banking model is being transformed by new entrants touting faster, cheaper services thanks to cryptocurrency technology, panelists said. They urged financial institutions to consider what they can learn from Bitcoin as well as digital currency developers like Ripple Labs and Stellar Development Foundation.
"We really can't close our eyes," said Cheryl Gurz, managing director of the emerging technology segment at Bank of New York Mellon Treasury Services. "If we as traditional correspondent bankers don't keep looking and determining where [cryptocurrency technology] will take us, new entrants will completely take our space."
Bitcoin now gives correspondent banking customers the option of sending money to one another directly, cutting financial institutions out of the process, said Wim Raymaekers, Swift's head of banking markets. Meanwhile, Ripple Labs' distributed-ledger technology allows local banks to move money back and forth while sidestepping automated clearing houses.
Banks need to ask themselves "what is the technology that is enabling Bitcoin currency to move effectively with more visibility and at lower costs," Gurz said. "How can we take that into our current systems and make them more efficient, faster, cheaper and more transparent?"
Protocols like Ripple and Stellar are "getting rid of bilateral legacy processes that banks have been using for years to keep money in their pockets," she continued. Gurz recommended that banks consider "strategic partnerships and alliances" with such firms in order to keep up with customers' evolving expectations.
Some banks might hesitate to adopt distributed-ledger technology because of concerns about running afoul of regulators, some of whom have expressed reservations about cryptocurrency as a potential magnet for money laundering and other criminal activity.
But regulators' concerns may be overblown, said Houman Shadab, a law professor at New York Law School.
"From a compliance perspective, these distributed ledgers provide a database of transactions, and that's a good thing," he said. He pointed out that while Bitcoin was the currency of choice for the now-shuttered online black market Silk Road, "it was evidence based on the electronic paper trail from Bitcoin that was used to find the defendants in that case guilty."
"Once you look past the headlines, it's a great investment from a bank's perspective to go to these technologies," Shadab said. Whether banks adopt Ripple Labs' distributed ledger or use their own, he said, quicker settlements will help them reduce costs.
Banks can use some of those savings to invest in lines of business complementary to correspondent banking like supply-chain finance and trade finance, Shadab said.