Bitcoin is what is referred to as a cryptocurrency. “Crypto” is derived from the Greek word κρυπτός (kryptós), which means secret or hidden. A purely digital currency like this is calculated on many computers worldwide. In other words, it is created de-centrally and therefore also not subject to controls by a central bank. Bitcoin can be lent, traded, transmitted digitally and exchanged for euros and US dollars. However, in each case, a bank is not involved. Bitcoin is currently the most well known of several hundred digital currencies. Others include Bitcoin Cash, Ethereum, Ripple, Dash, Monero or Stellar.
Bitcoin would not exist without blockchain technology (see questions and answers on blockchain below). Seamless entries in a distributed, digital register ensure, for example, that a bitcoin is only issued once. In addition, everyone can follow where a bitcoin has originated from anywhere. Bitcoin is a public register – what is referred to as a permissionless ledger. Because the participants in bitcoin transactions do not know each other, the security requirements for the register are higher than for a private register, i.e. a “permissioned ledger”. In this case, the participants carrying out transactions know each other. This makes it less probable that fraud and other misconduct and disruptions will occur.
They haven’t played a significant role to date. Bitcoin is a public register, whose participants are anonymous. Private distributed ledgers, where the participants know each other – otherwise known as “permissioned ledgers” – are the predominantly suitable type for banks. After all, banks must have precise knowledge of their clients and protect their data. What is more: in many countries, banks are as yet not permitted to trade in cryptocurrencies on behalf of their clients.
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Ulrich Stephan, Global Chief Investment Officer at Deutsche Bank Private & Commercial Clients, recently urged people not to get involved with bitcoin and similar currencies as long as the market remains unregulated: “Cryptocurrencies are neither covered by the economic strength of a currency area nor by gold. There is no uniform international regulation: in some cases, they are regulated in the same way as for commodities. Sometimes the exchange platforms for bitcoin cease to operate. Added to this is the fact that in the past six months, bitcoin has fluctuated ten times more strongly than the DAX and also more than exotic currencies such as the Malagasy ariary or the Botswana pula. The Egyptian pound and Kenya schilling almost appear to be safe havens by comparison.”
Wealth Management Chief Investment Officer Christian Nolting’s team envisage cryptocurrencies as a new asset class and an interesting diversification alternative for Wealth Management clients. However, the experts also draw attention to the potential high risk of losses and categorise the digital currencies as “highly speculative investments”.
Jim Reid, Global Head of Fundamental Credit Strategy, Deutsche Bank: “If we're correct, the fiat system may be seriously tested over the coming decade and ultimately we may need to find an alternative. […] the current speculative interest in cryptocurrencies is more to do with blockchain technology. Over the years ahead there may well be more and more desire for alternative mediums of exchange.”
Jamie Dimon, CEO, J.P. Morgan: “Bitcoin is a fraud and will blow up”
Carl-Ludwig Thiele, Bundesbank Board member: “Bitcoin is a means of exchange which is not issued by a central bank, but by unidentified actors. I do not see it as a currency. We can only warn people not to use bitcoin to preserve purchasing power. But we don’t make investment decisions for the people.”
Bill Gates, Microsoft founder: “Bitcoin is better than any currency we know.”
The term is a compound of “block” and “chain”: data sets – transactions for example – are recorded as blocks in a digital ledger. These blocks have a time stamp and contain all data that is important for the transactions and are linked – or “chained” – to each other. Blockchain technology is based on a decentralised transaction register, a so-called “Distributed Ledger Technology”, or DLT for short.
A digital accounting system that does away with the need for a central register. Each participant has their own copy of the digital register and the entries are updated simultaneously at each participant, so each of them always has the same data status. What is special about blockchain is that although numerous parties play a role in this decentralised accounting system, a consensus is reached about which entries are correct.
It enables people or machines to administer such data sets seamlessly and simultaneously on a decentralised basis. This means that many places that have centrally administered such information up until now will no longer need to do so. Since all the participants in a blockchain have the same information all the time, the central institutions also cease to have an information advantage. In short, blockchain does it faster, cheaper and better. Moreover, if one participant stops working, the whole system remains operational.
For example, for a container carrying flowers to be transported from Africa to Europe, around 200 individual steps need to be documented. A lot of this documentation is done on paper. This expensive, complex and can delay the shipping. This might soon be a thing of the past thanks to blockchain, because it gives all participants the same up-to-date information so that everyone knows at any time which stages the container has passed through, which approvals have been submitted and which ones still need to be obtained.
Blockchain will be relevant everywhere that lists or registers are kept and have to be constantly updated – for example at insurance companies, in the healthcare sector as well as in public sector institutions, but also in the financial industry.
The test and pilot phase is well underway. Blockchain can thus be compared with the internet in early 1990s: the financial sector is just recognising its potential, and Deutsche Bank is exploring how it can utilise the new technology on its journey to becoming a technology-oriented company. We are focusing clearly on the opportunities presented by the technology. Banks who cling to their traditional business models, however, may well regard the technology as a threat.
- It simplifies daily operations: units of value – goods and money – are transferred simultaneously, which renders reconciliation unnecessary. In other words, clearing and settlement become much faster.
- The high level of transparency helps banks fulfil regulatory requirements more efficiently.
- The new technology also reduces the risk of a business partner inadequately fulfilling their obligations; the conditions of a transaction are transparent and unalterably fixed.
- The risk of fraud is lower because the decentralised register stores the entire history pertaining to any transaction as well as the origins of the traded assets.
- Blockchain technology also saves money as interim steps and workarounds become superfluous because all the parties use a shared register.
- For settling a securities transaction,
- For trade finance,
- For corporate finance, for instance with syndicated loans and bond issuance,
- For onboarding new clients, to verify their identity.
Generally, private distributed ledgers, where the participants know each other – otherwise known as “permissioned ledgers” – are the only suitable type for banks. The background is that banks must have precise knowledge of their clients and protect their data. In public ledgers, by contrast, the participants are anonymous – as is the case with the cryptocurrency bitcoin.
Not yet across a broad front, but there are some trailblazers. The Swiss city of Zug, for example, is very active here: it started using the technology very recently to digitally identify its inhabitants – a type of digital ID document whose data is stored centrally with the city authorities but in the blockchain technology itself.
The first applications in the financial industry can be expected as soon as next year. Most of them are still at an early stage, however.
Banks are subject to strict requirements laid down by regulatory authorities and lawmaking institutions. They have to comply with data protection laws and be able to remain operational even in an emergency. That is why a new technology has to fulfil exacting requirements: it has to deliver documented robust functionality. This is one of the reasons why we are working closely with other banks on distributed ledger technology. We share information on what works and what does not, which reduces development costs and develops a new standard for how the new technologies can be utilised for clients.
- The “R3” consortium: since its launch in September 2015, we and other financial companies have been testing together where and how we can jointly use this technology in our industry, for instance in areas such as digital identification and in the capital markets business.
- The “Utility Settlement Coin” project: here we are combining the advantages of both digital and traditional currencies to smooth transactions using blockchain, first between other banks and later between companies.
- The joint platform “we.trade”: as one of the founding members of (previously called “Digital Trade Chain”) we are working closely with other European banks to make domestic and international trading much simpler for small and medium-sized enterprises.
- KYC project: we presented a study, together with IBM, on how banks can reduce their costs and operational risks by using a joint platform for “Know your customer” analysis. This platform uses blockchain technology.
- In January 2018 we joined the World Economic Forum Center for the Fourth Industrial Revolution. The centre brings together business leaders, governments, start-ups, civil society, academia and international organizations to co-design and pilot innovative approaches to governance for emerging technologies such as artificial intelligence and blockchain.
- We also joined Hyperledger as a Premier member in May 2018. The group, created by the Linux Foundation, consists of over 170 members aiming to advance cross-industry blockchain technologies. The membership will provide Deutsche Bank with access to a global community of developers and enterprise grade open source technology, as well as the opportunity to contribute to the growing open source code base.
- “If blockchains ran the world: Disrupting the trust business”, The Economist
- “Welt ohne Banken? Die Blockchain-Revolution (A world without banks? The blockchain revolution)”, 3sat documentary (in German)
- “Bitcoin – Der Kampf der Digitalwährungen (Bitcoin – The battle of the cryptocurrencies)”, FAZ article (in German)