The Mt. Gox Bitcoin disaster and the need for innovation in the finance industry

05.03.2014 by Martin Kuppinger

A few days ago, Tokyo-based Bitcoin exchange Mt. Gox appeared to be in trouble. When looking at their website Friday morning, I only found meaningless announcements. They are “working very hard to find a solution to our recent issues”. Looking at the situation realistically, chances are high that the owners of the Bitcoins have lost a significant part, if not all, of their money. Just a few hours later, the news spread that Mt. Gox has gone bankrupt. while it is still unclear what exactly happened and what will happen now with the Bitcoins and Mt. Gox, this sheds a light on the concept of Bitcoins. Bitcoins were claimed to be absolutely safe. However, when you cannot use them but instead lose your “money”, this obviously is not the case.

There are good reasons for having trusted parties in the Finance Industry. Despite all the turmoil that industry went through in recent years, but also back in the Big Recession and in other times, the concepts worked relatively well.

On the other hand, the initial success of the Bitcoin currency also demonstrated that there might be a need for other concepts, aside from traditional currencies and the way financial transactions are handled. Even while the concept of Bitcoin might have been the wrong answer, that discussion will continue. Aside from requiring a trustworthy provider and exchange infrastructure, there are other questions to answer. One is about security, with an increasing number of attacks. Overall, there is a strong trend towards crypto-currencies. We will see a lot of evolution, we most likely will see failures and disasters, but it is not likely that crypto-currencies disappear again.

It will be interesting to observe how the Finance Industry reacts to that pressure. While Bitcoins are the most prominent topic these days, PayPal and other new players in the mobile and online payment market probably are the bigger challenge to the Finance Industry. PayPal in fact is a specific new type of Financial Institution. PayPal is a bank that knows how to provide APIs and how to interact with other players. It knows how to support the supply chains. It knows how to find the balance of security and customer convenience.

On the other hand, Financial Institutions still are trusted, when it is about money. They know how to do security. The challenge is how to make the banking business fit for the changing landscape of the Computing Troika (of Cloud Computing, Mobile Computing, and Social Computing) and enable them to provide their proven services for a world of consumerized IT. It is about API-enabling that industry.

However, that is more of a technical perspective. In fact, it is about moving banking IT to a level that allows Finance Institutions to leverage their strengths while becoming agile enough to compete with new players in the market. There is a strong potential for trusted Financial Institutions to do so. However, that requires banks looking closely at API Management and Security, BYOI (Bring Your Own Identity), trust and privacy concepts such as the Life Management Platforms.

EIC 2014 will dive into this topic in the Finance Industry Roundtable on the “Future Model of Banking”. Discuss and learn how to enable business agility by doing the things right in IT.

I personally believe that classical financial institutions have a strong potential in the future Finance business, despite Bitcoins and other concepts. I also believe in regulations. There is a good reason for regulations in the Finance industry. Having such regulations in place might have avoided the situation Mt. Gox and Bitcoins are in today. That is where the established Finance Industry comes into play: Making crypto-currency more secure by providing professional services, complying with the regulations. Regulations will come for that field – and then, the Finance Industry has an advantage again, if it is agile enough to support these new models by then.

Clearly, you might argue that the main value of crypto-currency is not about having a regulated and safe method of payment but one that is not traceable. It was Silk Road that brought Bitcoin to prominence. The question is whether there is a need for crypto-currency aside from the dark side of the Internet. I think to, with crypto-currencies being the “cash” of the Internet. No transaction fees, no fees for exchanging into other currencies. There is a potential value in using that type of currencies.

However, regulation and anonymity do not necessarily exclude each other. Take the analog world as an example: cash money lets me buy whatever I like anonymously, but the place where I deposit my cash (bank) is regulated. Banks should try to be clever enough to provide the trust that is created by regulation to the crypto-currency world.


  • John G Bullard

    Hi Martin;
    The Five Pound note in my pocket is a promissory note signed by the Chief Cashier for and on behalf of the Governor and Company of the Bank of England. It promises to pay the bearer the sum of five pounds.
    The US dollar bill is a Federal Reserve Bank promissory note and is signed by the Secretary of the Treasury and co-signed by the Treasurer of the United Sates.
    I may not know any of these signatories and I may not know personally the organizations upon whom the liability rests, but I do trust that the note is genuine and I have to trust those national institutions- therefore I trust the value that each note represents. It is not clear to me where such liability lies in the case of BitCoin when it goes wrong…… evidently not Mt Gox…. ! Kind rgds John

    • Martin Kuppinger

      Hi John,
      good point. But again: Anonymity and regulation do not necessarily exclude each other. There might be regulated (and guaranteed) cyber-money that combines the benefits of cyber-currencies and of "real" money (not that the five pound note and the US Dollar bill had a "real" value in the sense of material value… – but that is another topic).
      Martin

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