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Innovation insights

As the race for competitive advantage continues and with the digital economy growing at twice the rate of the wider economy1, businesses will look to invest in the innovations which can impact their bottom line the most. It is important, however, to understand the challenges on the horizon.


Cryptocurrencies
   

George Osborne, Innovation Director at Barclays

Virtual currencies, perhaps most notably Bitcoin, have captured the imagination after a spectacular rise in 2017.

Bitcoin made headlines throughout the world in late 2017 as its value rose from under $2,000 in the summer to a high of over $19,000 in December. Recent falls and volatility have then concentrated investor and regulator minds on the issue. It’s fair to say everyone is talking about cryptocurrencies, even if they don’t fully understand them.

So what is a cryptocurrency?

In essence a cryptocurrency is a digital unit of exchange which is given value by scarcity and demand. Encryption techniques are used to provide their ownership, regulate their use and generate their release.

Traditional currencies, such as the US Dollar and Sterling derive their worth from the promise of value given by a corresponding government or sovereign state. Or to put it plainly; a dollar bill is worth something because the US government say it is. These are known as fiat currencies.

Cryptocurrencies on the other hand rely on the power of the internet to guarantee their value and confirm transactions. Typically, users on a network verify every transaction, and those transactions then become a matter of public record. This prevents the same digital currency or coin from being spent twice by the same person.

The value of a cryptocurrency is mainly determined by the demand and supply for the currency. To give an idea of some of the main drivers of value:

Supply Demand
Physical energy used to create the cryptocurrency Utility or usability of the currency as a medium of exchange
Difficulty level of “mining” or encrypting the currency Investment fluctuation and trends
Reward for the ‘miners’ or validators of the cryptocurrency. Ability to represent the value of another asset

Unlike fiat currencies, cryptocurrencies are not currently controlled by any one bank, government or centralised financial authority.

The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym Satoshi Nakamoto. Its value grew by more than 1,000% in 2017, but that wasn’t enough to even place it among the 10 best-performing crypto assets of last year.

Performance – Ripple rose an astonishing 36,000%

In a breakout year for cryptoasset trading, the biggest winners were Ripple – which is touted as a new kind of payment system for banks (and is separate to Ripple’s own cryptocurrency XRP) – along with names like NEM, Ardor, and Dash.

Top 10 cryptoassets of 2017 by % value increase, including Bitcoin

Image of graph of top 10 cryptoassets of 2017 by % value increase, including Bitcoin

Note: Growth over Jan’17 to Jan’18
Source: CoinMarketcap

Pros and Cons

Cryptocurrencies offer the promise of sending and receiving value anywhere in the world at any given time. No crossing borders, rescheduling for bank holidays, or any other limitations that may occur when transferring traditional forms of money. This promise hasn’t quite been delivered, but the decentralised and automated nature continue to attract attention and investment money.

Right now digital currencies such as Bitcoin are not consistently accepted as a means of payment or form of exchange. There are limitations on hacking of wallets and anonymity of users that companies and banks struggle to accept. While a handful of companies, such as Subway and Expedia, do accept Bitcoin payments they have a long way to go to be considered a mainstream payment method, that is if they ever do make it that far.

So what?

Cryptocurrencies have accumulated plenty of interest recently, but the banking industry is focused on using the technology that underpins it – Blockchain. Banks see Blockchain-like technology being applied to areas of their businesses from trading to money transfers – the promise is cost savings and faster processes – this use is unlikely to feature ‘un-permissioned’ chains such as Bitcoin in the mainstream.

Barclays and a number of other banks have been trialling different use cases for Blockchain technology. Last year, Barclays tested derivative documentation co-ordination using Blockchain technology. Still, the industry admits it is early days and more work needs to be done to integrate this into everyday processes in banks.

Blockchain could indeed mean change for the way we transfer data, across many industries. To find out what Blockchain does and how it’s being applied to banking, read our recent article on Blockchain.


Blockchain
   

'Shared economy’ or ‘collaborative economy’ are the terms often used to describe economic and social activity involving online transactions. So if you’ve caught a ride from Uber or stayed in an AirBnB rental, then you’ve been part of the shared economy – you’re transacting with another individual or company using the platform provided by Uber and AirBnB. Blockchain takes this concept a bit further. By allowing individuals to connect, share and transact directly, it enables real peer-to-peer transactions and a true ‘sharing economy.’

Blockchain – a distributed ledger

The Blockchain network consists of multiple nodes, and in most implementations, all nodes have a copy of the whole Blockchain, and so the network has no single point of failure. The content of a block cannot be altered once it has been signed (immutability). In addition, it eliminates the need for third-party validators such as contract executors, payment processors and brokers.

By providing trust in a network without a central authority, Blockchain makes any activity – however small – easy to monetize, and is therefore expected to create new markets where individuals can trade non-traditional assets like reputation, data and attention.

Key players

Some companies are now offering private solutions, such as Ripple for financial settlements and Guardtime for data integrity. The Hyperledger project, led by Linux and including IBM and JP Morgan, is attempting to build a cross-industry open standard.

Currently, banking is the sector taking Blockchain ecosystems more seriously than any other sector. In 2015, financial innovation firm, R3, established a consortium partnership with the world’s leading banks (including Barclays) to provide distributed ledger technologies to economies worldwide, with more than 70 financial institutions now participating.

The consortium's joint efforts have created an open-source distributed ledger platform called Corda. Corda, which was open-sourced on 30 November 2016, is specially geared towards the financial world as it handles more complex transactions and restricts access to transaction data.

Why does it matter?

The benefits of a distributed ledger ecosystem extend beyond the financial sector. For instance, in the public sector, a secure, distributed ledger can provide more openness and transparency, and transform services and processes including licensing, personal identification, voting records, utilities, benefits management, and more. Many other industries such as retail and manufacturing can benefit from better supply chain management, smart contract platforms and digital currencies, and tighter cybersecurity.

It is worth noting, however, that with the technicalities involved, new technology, start-up developers, incumbent providers, main markets of usage, clients of main market users and, finally, customer of clients, it may take at least a decade before it becomes mainstream… watch this space.

     

     

Blockchain

Read George Osborne’s previous post on Blockchain.