Innovative do: Santander is playing around with bitcoin technology

Santander is playing around with bitcoin technology — and can think of 25 ways to use it

Ana Botin, the chair of Spain's largest bank Banco Santander attends the Most Powerful Women summit in London, Britain June 16, 2015.

Banks mostly aren't interested in bitcoin, but they are interested in the software that runs the digital currency — the blockchain.

Banks run on systems that were in some cases built decades ago and as a result are slow, costly and cumbersome. The blockchain — the program that lets people send bitcoin to each other and records those transactions — doesn't have these legacy issues.

The blockchain keeps a public record of transactions, spread across a distributed network, and allows much quicker transfer of balances. As a result, sending bitcoin is faster, cheaper and more transparent than sending traditional currencies.

That makes it attractive to banks looking to soup up their money transfer businesses, but the technology also has potential in other areas — distributed ledgers could be used for "smart contracts" when banks make loans, for example, recording who's borrowed what across a public network.

"We have internally identified 20 to 25 use cases where this technology can be applied," Mariano Belinky, head of Santander InnoVentures told Business Insider at MoneyConf in Belfast this week. Belinky reeled off international money transfers, trade finance, syndicated lending and collateral management as some of the areas where blockchain technology could be applied.

Santander, the world's tenth biggest bank according to Forbes, is one of several lenders investigating how to use the blockchain in traditional banking. UBS has set up a blockchain research lab in London, Goldman Sachs has invested in bitcoin startup Circle and Nasdaq is also experimenting with the technology.

It's pretty clear why the banks are doing all this. As well as making their systems smarter, it could save them a huge amount of money. A report co-authored by Santander earlier this month estimated that blockchain technology could reduce banks' infrastructure costs by up to $20 billion (£12.8 billion) a year.

Julio M Faura, global head of R&D innovation at Santander, told Business Insider: "For us, the first obvious space to explore all of this in is payments, particularly international payments. Later on we think smart contracts have the potential to transform many of the other things we do.

"We still haven’t made anything official, we haven’t announced anything publicly, but we have an internal team working on this. We’ve done some proof of concepts."

Faura is heading up a team in Santander dubbed Crypto 2.0 — referring to cryptocurrencies — which is carrying out experiments with the blockchain and digital currencies.

Santander InnoVentures, which Belinky heads, is the Spanish banking giant's $100 million (£64 million) fintech investment fund, launched last year. The fund has made 3 investments so far and Belinky said 2 more are close to completion. A source told Business Insider that one of these is a startup working on blockchain technology. Belinky declined to comment.

Belinky told BI: "We’re very excited about distributed ledgers and blockchain technology. They really have the potential to disrupt many of the basic processes we have underlying our transactional products."

"What we see as the foundation use case, which is international payments, we don’t really need a coalition of 50 banks to make it work. We have ten major geographies. Just us connecting our ten major geographies will allow 100 million customers to make instant payments worldwide. If we partner with two or three banks similar to us we’ve got pretty much global coverage."

But Faura adds: "This thing will only be interesting if many banks take part and collaborate. We are talking and experimenting with several banks."

Belinky chips in: "It’s like having the first phone — there’s no point, you can’t ring anyone."

He adds that while Santander is very keen to explore the possibilities of blockchain, we won't be sending cash over blockchain networks any time soon. Belinky says that "while getting to a working prototype could be something that we do within months, getting to an actual product that regulators say is good to go and the compliance guys like — that will take a while."

Stephen Pair, CEO of bitcoin company Bitpay, told me during our interview at MoneyConf that he's in conversation with several banks about the potential of blockchain and related technologies. But he said: "I’ve been in and around banks for a while and they take years, even with software that’s well known and well understood."

Pair thinks it will be at least 5 years before any banks seriously adopt a version of blockchain technology.

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Santander is playing around with bitcoin technology — and can think of 25 ways to use it

Ana Botin, the chair of Spain's largest bank Banco Santander attends the Most Powerful Women summit in London, Britain June 16, 2015.

Banks mostly aren't interested in bitcoin, but they are interested in the software that runs the digital currency — the blockchain.

"We still haven’t made anything official, we haven’t announced anything publicly, but we have an internal team working on this. We’ve done some proof of concepts."

Faura is heading up a team in Santander dubbed Crypto 2.0 — referring to cryptocurrencies — which is carrying out experiments with the blockchain and digital currencies.

But Faura adds: "This thing will only be interesting if many banks take part and collaborate. We are talking and experimenting with several banks."

Belinky chips in: "It’s like having the first phone — there’s no point, you can’t ring anyone."

Pair thinks it will be at least 5 years before any banks seriously adopt a version of blockchain technology.

Join the conversation about this story »

NOW WATCH: Forget the Apple Watch — here's the new watch everyone on Wall Street wants

Here's what the next recession could look like

newspapers stock market

Since World War II, the average expansion period for US gross domestic product has lasted less than five years — and the current expansion is now in its sixth year. Does that mean we're due for another recession?

The GDP slowdown in Q1 of this year had some economists fearing that a recession was near. But recent strong economic data has calmed those fears.

Recessions don't just happen because they are overdue; they need to be induced by some event.

A 'lesser recession'

In a note Thursday, Dario Perkins of UK-based Lombard Street Research pointed to the stock bubble as the most likely cause for an upcoming "lesser recession."

"Asset prices have risen sharply over the past five years in response to low long-term interest rates and aggressive central bank stimulus," Perkins wrote. "This presents an important risk to the global economy, perhaps the most likely trigger for the next recession."

He added, on a positive note, that unlike the most recent economic downturn, the next one would likely only be tied to stock prices. This is because while stock values have skyrocketed over the past few years, home values in developed economies have made modest gains. Though a stock market crash would be a bad thing, it wouldn't nearly have the same effect on GDP a housing market crash.

Think dotcom bust, not global credit crisis

Perkins illustrated his point by comparing the effect on GDP from both the dotcom crash and the subprime-mortgage crisis. During the dotcom bust, which didn't affect housing prices, GDP continued to rise for the most part in the quarters following the stock market peak.

Dotcom Bubble vs. Housing Bubble

He also pulls research from the Bank of England showing that credit trends, while very similar to the trajectory of the business cycle, have peaks that are twice as large and twice as long. The worst recessions are those that coincide with a credit crunch, as in 2009. But we are still in a credit upswing since then. In other words, the next recession isn't likely to be accompanied by a credit bust, which will further mitigate the harm done.

The next downturn will also be protected by the still sluggish recovery from 2009. That is, there are fewer imbalances, less systematic risk, less household debt, and less bank leverage.

A more mild recession will be good for central banks that have limited tools left to respond to an economic crisis. Interest rates — already near zero — can only go so much lower, and a very high benchmark would be needed to justify restarting QE.

Perkins explains:

Suppose, for example, the next recession is caused by the bursting of a bubble in equity prices. Would QE be able to reverse such a decline? And if central banks were blamed for causing this bubble, would they be willing to try to reflate the bubble with the same policy? Obviously we can only speculate about this, but it is clear both the Fed and the Bank of England were anxious to stop doing QE because they were concerned about its potential impact on financial stability.

In short, while Perkins thinks a stock market crash could cause a recession soon, the effects will be nothing like those felt in 2009.

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