| | July 20169CIOReviewthis development. For example, a team from RBS recently won the Deloitte Digital #GoneHacking capital markets hackathon, presenting a trading platform based on Ripple integration with other cryptocurrencies. The win demonstrated significant resource commitment by RBS to developing a solution for trading and capital markets integration.Other top-tier firms are exploring how to make Bitcoin more efficient than current payment systems. They see potential for cryptocurrencies to offer lower-cost transaction processing and settlement, assuming the infrastructure can be adequately standardized. Meanwhile, other firms are simply taking a wait-and-see approach, while the questions surrounding the new technology get addressed, and standards are developed. The central banks, since they control the current monetary system, seem to see the new digital currencies as a threat. They are already working on their own alternative versions, such as RSCoin, which was developed by computer scientists in the UK in coordination with Bank of England. The difference with this approach is that it would maintain state control over the currency, whereas the previous prototypes were not controlled by any political or state-sponsored entity. While this would make most digital currency enthusiasts cringe, it may become the eventual reality as the primary monetary authorities assert themselves in this arena.Government Response Beyond the financial sector, governments are reluctantly adjusting to the potential these new currencies represent. To date, the direction is clear: Follow the law and standards set for existing currencies, or face stiff penalties. Recent legal decisions focus on disclosure and reporting requirements, and have applied the same standards necessary for non-digital fiat currency.Yet, governments will likely want to leverage these currencies to increase visibility to financial transactions, because, in the current market environment, cash-hungry entities seem to be much more focused on increasing tax revenue than protecting privacy or financial freedom. For background, simply review the Foreign Account Tax Compliance Act (FACTA) or Base Erosion and Profit Shifting (BEPS) legislation to understand their motivations. As expected, the technology is far out-pacing the regulatory landscape, while securities enforcement agencies are relying on existing laws to regulate new transactions and digital currencies that are vastly different from the government-sponsored fiat of years past. Much remains to be decided on the legal and regulatory standards; however, the market is not waiting for "official" guidance. Innovation will continue, and governments will ultimately have to respond.What's Next?There are more questions than answers at this point, but the clock is ticking. Firms that seize the opportunity will have a decisive advantage, and will reap big rewards if they execute properly. Institutions that are late to the game may have a chance to adopt, but the risk of waiting is very high. Regardless, everyone will need to balance significant technological investments with unclear regulatory requirements from multiple entities and jurisdictions, increasing the risk of failure. In the end, cryptocurrencies are likely here to stay, and financial institutions serving the capital markets need to start aggressively preparing for the inevitable, and highly disruptive, impact. Cryptocurrencies are likely here to stay, and financial institutions serving the capital markets need to start aggressively preparing for the inevitable, and highly disruptive, impact
< Page 8 | Page 10 >