Banking on Bitcoin: Operational Inefficiencies

Editor's Note: Due to the sensitivity of his industry, Bob wasn't able to access a secure method to upload his first piece. We wanted it to be released on time so I submitted it under my account, for now, as we develop a better protocol for his submissions. -Matt Odell

We are happy to announce our newest column: Banking on Bitcoin. The column will explore the potential of Bitcoin and other digital currencies from the perspective of an anonymous Wall Street insider. Bob Fogg is an anonymous finance insider and our newest contributor at Coinprices. He works at a large buy-side firm, which provides him with an intimate view of the industry.

Banking on Bitcoin: Operational Inefficiencies

BY BOB FOGG

At a financial firm’s most basic level, it operates as such: a person gives money to the firm the firm does stuff with the money the firm returns the money to the person. Depending on the nature of the financial firm, it may be investing the money on behalf of the person, it may be issuing loans with the person’s money, or any number of activities. In even this basic model, a minimum of two transactions of value must take place between the firm and the person: the person initially giving the money to the firm and the firm returning the money to the person.

Regarding the above model, the financial system is antiquated regarding the actual movement of capital. There are a variety of players involved outside of the person and firm such as third party banks, clearing houses, and wire transfer agencies who all take cuts off of capital movement. The complexity of the current capital transfer structure breeds huge inefficiencies given the inherent friction between all the moving parts. Each additional third party player involved in the capital movement increases the opportunity for a transaction error. This error may be as small as a teller typing an incorrect digit of a routing number, delaying the transaction for days. Wire transfers exist today as a next-best-thing replacement for hand-to-hand transactions, however, digital currencies are a cheaper, faster, and more reliable alternative.

The problems outlined with wire transactions may seem inconsequential. But when one looks at the sheer number of transactions that occur on an institutional level every day, the complexity errors multiply to exponential degrees, causing huge inefficiencies with lost time, money, and patience.

Entire teams at financial institutions are dedicated to solving wire transfer problems to ensure these transactions are as frictionless as possible. These teams cost money, and despite the prevention of transaction errors being a team’s job, errors are still made on a regular basis, be it the fault of the team, the investor providing the wire information, or a third party.

One particular incident poignantly displayed the inefficiencies of the current system. My firm was issuing a first-time capital distribution to overseas investors, and, due to this being the first distribution, the investors’ wiring information had yet to be tested before the cash was moved. In some instances we wired the cash directly from our company to the investor’s bank account, but in most cases third party clearing houses and foreign exchange rates were involved. Naturally, a comedy of errors occurred and the cash did not reach most investors’ bank accounts by the scheduled date. These wire transfer errors resulted in delays of multiple days and even weeks for some distributions, as well as plenty of extra incurred costs on my firm’s side of the transaction. The botched transfer cost us money and hurt our reputation with investors, who were now angrily demanding their promised distribution.

This seemingly one-off state of affairs occurs every single day on both individual and institutional levels, costing the participants on both sides of the transaction unnecessary time, money and patience. Using digital currencies solves wire transfer issues to a significant degree by forgoing the wire transfer process altogether. The number of moving parts in the process is reduced to two: the transferor and the transferee, no third parties necessary. The cost to transfer cash is cut down to 1% or less, regardless of the amount and distance. The wait to receive cash becomes a matter of minutes, not days.

Digital currencies remove the necessity to trust third parties to facilitate transactions which allows a more efficient and frictionless flow of capital. All new technologies exploit existing and ingrained inefficiencies by removing friction. Whether the friction was apparent before the new technology’s existence is irrelevant.


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