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Disruptive thinking hits NYC

Fintechnician Chris Skinner sketches future for finance

Disruptive thinking hits NYC

After hearing Chris Skinner talk about “Colored Coins,” I looked them up online, and viewed the video.

“Somewhere, probably several somewheres,” I thought, “regulators are twitching about this,” as the short video finished.

Banking consultant and futurist Skinner, speaking to a New York City audience of financial experts and a few reporters at the Penn Club, had at one point in his presentation spoken said this about Bitcoin:

“Bitcoin is nothing to do with currency—it’s to do with technology.”

At first thought, one’s reaction is, “well, it sure smells like money,” though I have a relative who invested in a Bitcoin mine, and let’s just say he doesn’t bring this up anymore (and I don’t press it).

Specifically, Skinner referred to the blockchain protocol underlying the virtual currency. As explained in more detail in our recent interview with Skinner—“Q&A: Chris Skinner on ‘suits’ versus ‘jeans’”—the blockchain is a ledger, where the sequence of ownership of given bitcoins is recorded and which can be examined.

Skinner believes Bitcoin will in time come under some scheme of regulation, much like other forms of value, and that the ultimate realization of its potential won’t lie solely in exchanging “money,” but offering a new means of trading.

Poster child for Bitcoin revolution?

He cited Colored Coins, which uses the Bitcoin rails for new purposes.

In simple terms, colored coins are specially tagged bitcoins that, once “colored,” can be used to represent other assets besides bitcoins. They essentially piggyback on the Bitcoin blockchain system. [See the Colored Coins homepage and “What are colored coins?”]   

To a regulator, the site’s video makes Colored Coins sound like it will spread the perceived anarchy of Bitcoin, I am sure. The narrator says at one point, “Wouldn’t it be great to trade anything as easily as you can send a bitcoin from A to B?”

I am sure most regulators would respond, “No, that’s not great.” Colored Coins envisions people trading securities or commodities, for instance, via the Bitcoin rails rather than through traditional regulated exchanges, for example.

“By ‘coloring’ a bitcoin, you turn it into anything you want to trade,” the video narrator states. In fact, even other, “real world” currencies can be traded through Colored Coin’s overlay of the blockchain, the site indicates. Given the coloring scheme, it is no surprise that the Colored Coins “mascot” is a chameleon.

No doubt that causes some twitching in some quarters, too.

But to Skinner, the special nature of the blockchain is what makes Bitcoin more a technology than a currency. The blockchain can’t be altered or undone, making it a record that can be relied on, so the thinking goes. Some have dubbed Bitcoin “the internet of money.”

Skinner acknowledged that Bitcoin has been tarnished in the eyes of some by developments such as the Mt. Gox debacle. He dismissed this as confusing a player with a system. Mt. Gox, he pointed out, was a trader, not the currency. Dismissing a system like Bitcoin because of a bad actor, he said, is akin to dismissing the dollar and the established securities markets because of the bad actions of failed Bear Stearns.

“What we really need in the crypto-coin arena is regulation,” Skinner insisted. He said that he envisions a time that virtual currencies will be regulated and that value stored in them will also be insured by entities like FDIC.

Value of the virtual

Skinner had opened his presentation noting that in his next book—his most recent is Digital Bank: Strategies To Launch Or Become A Digital Bank—he will discuss in depth his concept that increasing value will be realized in intangible but very real assets in the virtual world. The ability to ride the rails of Bitcoin is one example. Others include, for Skinner, the value of a “favorite” on Twitter, a “like” on Facebook, and more.

And Skinner noted that 40% of the gross domestic product of Kenya is funneled through the text system, using systems such as M-Pesa. (M-Pesa means M, for mobile, and Pesa, Swahili for “money.”)

In the recent annual letter of the Bill and Melinda Gates Foundation, an entire section was devoted to that organization’s belief that mobile banking will help the world’s poor transform their lives.

This is part of a bigger movement where the utility of a mechanism will transcend the individual pieces used to make it work. For example, Skinner sees the “internet of things” concept as far more important than mobile apps.

Into this Skinner looped in peer-to-peer lending, which he sees further eroding the traditional use of the bank branch system.

“Peer-to-peer eradicates the importance of physical presence,” Skinner told his listeners. “In Code We Trust.”

He made a point regarding branching, as well.

“I don’t advocate the branchless bank,” said Skinner. “I advocate the less-branched bank.” In some ways, he said, traditional banks nestle in their regulation, because it gives them the opportunity to avoid changing as readily as a completely free market would cause them to—“unless they want to be a leader.”

Investment and regulation

Fintech investment keeps booming as the attraction to new technologies and new opportunities proves irresistible. Skinner cited figures announced during the Money 20/20 event last year that $20 billion has poured into fintech. One third of that has gone into payments innovations, and two thirds into data analytics, banking services, peer-to-peer platforms and crypto currencies.

Meanwhile, traditional regulators struggle to keep up with these evolutions as they build up pace, Skinner said.

He said that in a recent entry on his Finanser blog he repeated a well-known saying in the City of London regarding financial evolution: “Things will be run by one man and his dog. The man will be there to feed the dog. The dog will be there to make sure the man doesn’t touch the computers.” 

As he discussed at length in our recent interview, over time Skinner sees regulation fracturing into regulation of financial functions.

This is an evolution of the concept of functional regulation. The latter concept has been an rallying point for years for lobbyists to encourage like regulation for like functionality—everyone in the business of stock brokerage, for instance, to be regulated identically, regardless of charter.

But Skinner sees component-based regulation as going further. Licenses or charters or what have you would be granted by function. If you only wish to be one thing, that’s all you need be licensed for. He pointed out that in the UK, there is a payments system regulator and separate regulation for peer-to-peer lending.

A bit of food for thought regarding nontraditional payments: Skinner said he thought the best nontraditional mechanism in this country is the Starbucks account, accessible by card or mobile app.

“Starbucks is the best value transfer method,” he said. “And Starbucks isn’t even a bank. But it’s the easiest to use.”

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