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A single unit in the digital currency Bitcoin is worth around US$73, but in the new, complex world of breakneck innovation and rule-breaking entrepreneurs, this is less important than the size of its user base.
In just four years, Bitcoin has blossomed from a left-field idea to a billion-dollar experiment that’s forced banks to re-think their core business.
“The dollar price of a Bitcoin isn’t important,” says Bitcoin Foundation general counsel Patrick Murck. “The value of Bitcoin is in the community of people building it. As long as we have some of the best minds in the world working on this, Bitcoin will become more valuable,” he says.
Rooted in the open source software movement, which is based on sharing information, diluted governance and free access, Bitcoin has crashed through the barricades of an industry known for its high price of admission.
Launched in 2008, Bitcoin was designed as a peer-to-peer electronic cash system, where value transfers circumvent the existing financial system. The total number of Bitcoins was capped at 21 million, which gives the organisation a current value of around US$1.5 billion. As of May 2013, 13 million distinct Bitcoin ‘addresses’ had received funds denominated in the digital currency.
Bitcoin’s success has been driven by those that have difficulty engaging with traditional banking structures – the so-called un- and under-banked – and those seeking flexibility banks struggle to offer, with instant transactions across borders, for instance. This agility has sparked calls for greater regulation of the alternative currency, which has – in the eyes of its advocates – formed a blueprint for banking in the digital age that requires a response from banks.
With such strong initial momentum, you might think digital currency developers would seek to maintain their isolation and work to render traditional finance structures useless. Think again. The people behind Bitcoin are seeking greater inclusion and partnerships with entities like banks.
“Opening a Bitcoin account at your local bank would be the perfect win-win situation for banks entering the system and becoming innovative,” Murck says.
“It would also benefit the Bitcoin ecosystem and the under-banked populations of the world that struggle to engage with traditional banking.”
In fact, Murck believes the development issues facing Bitcoin could be efficiently resolved by mature organisations like banks that have experience in compliance, risk management and mitigation – areas where start-ups lack expertise.
“The two communities have common ground,” he says.
Behind the times
The take-off of innovations like Bitcoin signal an appetite in the digital age for new products and ideas, but also a deficiency of traditional companies in meeting these growing desires.
“Most organisations define innovation the same way they did 30 years ago,” says Haydn Shaughnessy, a long-time innovation-watcher who has co-written a book on the subject, ‘The Elastic Enterprise’. He also contributes regularly to the Forbes magazine website.
“There is a very complacent, immobile perception of what innovation means and the form it takes, but innovation itself is a fast moving area,” he says.
A key element of this new world is the diffusion of power, suggests Shaughnessy. Companies like Apple and Google, for example, rely on hundreds of thousands of external app developers to support their products.
“Informal organisations are becoming more important than formal organisations,” says Shaughnessy. “Firms need to understand that their external environment is itself a formal wealth creation mechanism.”
Although not a commercial entity, Bitcoin exemplifies this diffused power base, and has structured itself to be run by its members.
The Bitcoin Foundation is based on principles of openness and shared decision-making through member-driven committees to avoid “loci of power” forming, according to Murck.
The organisation posts its bylaws online and anyone can submit a request to change a bylaw, which can then be rapidly incorporated into the currency’s rulebook.
“It’s totally open. Everyone can see our bylaws and governance structure and anyone can have input into how changes can be made,” Murck says.
The Bitcoin Foundation has no power over the actual coding of Bitcoin, but works to promote, protect and standardise the Bitcoin protocol.
A fluid future
The adoption of more inclusive business structures may emerge as a key differentiator for enterprises in the digital age. Shaughnessy suggests that a number of large organisations have started to hire executives with experience in founding small companies to apply start-up principles to established companies.
“If you stack your organisation with people whose only experience is legacy, then you won’t go beyond legacy,” he says.
Kimmo Soramäki, founder and CEO of Financial Network Analytics, a firm that brings advanced data visualisation technology to finance firms, also predicts there may be greater outsourcing of core bank functions in coming years.
“Banks are learning they need to work more with external partners, which is a strategy companies in other sectors have found successful in dealing with a more complex world,” he says.
The ability for a collaborative, ad hoc organisation of enthusiasts like those behind Bitcoin to create a system worth over a billion dollars offers both a warning shot and a raft of opportunities for the finance sector.
Bitcoin has answered a number of questions banks themselves have failed to tackle adequately, specifically how can the Internet be harnessed to bring previously unbanked customers into the financial system? The response of banks to such trends in the digital age with their own innovative ideas could marry the established industry to a new breed of thinking.
“Every enterprise needs to know what’s happening in innovation, whether in banking or smart phones or infrastructure,” Shaughnessy says.
“The way in which companies innovate is changing, and that’s important for all firms.”
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