The world's third-largest bank hasn't given up on bitcoin.
While other major banks such as BNP Paribas and Wells Fargo are leery of the digital currency — preferring to build their own versions of its underlying technology, the blockchain — Mitsubishi UFJ Financial Group has partnered with a leading bitcoin company to improve cross-border payments.
During an interview Wednesday at the $2.9 trillion-asset bank's New York office, President and Chief Executive Nobuyuki Hirano outlined MUFG's effort to bring Coinbase's services to Japan — starting with international money transfers.
He said bitcoin offers a promising way to make the transfer process faster and cheaper.
"It costs a lot right now and it takes time," Hirano said. But by briefly switching to digital currency to move a payment across the border, "we can make it less costly and much quicker."
MUFG is an investor in Coinbase, which serves both consumers and businesses. Coinbase's free electronic wallet has 4.7 million individual users, and 44,000 merchants are using its platform to accept bitcoin payments from customers, according to its website.
The cross-border payments system MUFG envisions would convert a national currency such as yen or dollars into bitcoin to facilitate the transfer and then, as quickly as possible so as to avoid trouble from bitcoin's price fluctuations, it would be changed back to regular money again. Customers would never need to hold bitcoin at all.
Hirano acknowledged that one hurdle with the idea is consumers' distrust of bitcoin. But he said MUFG's involvement in the process could help boost confidence.
He also said MUFG could choose to insulate its customers from any fluctuation in the price of bitcoin by absorbing the impact itself. "We may want to take that risk," he said. "That's something we can think about."
But MUFG — the parent company of MUFG Union Bank in San Francisco — isn't banking entirely on digital currency as a future game-changer. It's also part of a global consortium of banks, put together by the software startup R3, that aims to apply blockchain technology to financial markets. R3 wants to develop a common platform, called Corda, to be used by all 70 of the consortium's members for a variety of applications.
In experimenting with both public and private blockchains, MUFG is much like other banks in the United States and Europe that are "making bets on both value propositions," said Gabriel Wang, an analyst at Aite Group.
However, few large financial institutions have been willing to openly place bets on bitcoin. They praise it, but only as an innovative method of asset transfer and recordkeeping they can learn from. MUFG appears to be going further.
Hirano laid out three challenges that will need to be overcome if the Coinbase partnership is to succeed, starting with consumer confidence. While bitcoin has high name recognition in Japan, the spectacular collapse in February 2014 of Tokyo-based Mt. Gox, once the world's largest bitcoin exchange, has given it a bad reputation.
The volatility of bitcoin itself is another drawback. The digital currency has historically been subject to wild price swings; its value has gone from below $350 to more than $675 in this year alone.
But it is possible to negate that issue if Coinbase is able to convert the yen into bitcoin and back again quickly enough.
Finally, there is the issue of regulatory compliance. Table stakes are for Coinbase to be approved to do business in Japan by the country's Financial Services Agency. Beyond that, both companies will have to comply with Know Your Customer requirements.
Fortunately, said Hirano, Japanese regulators overall are looking favorably on bitcoin.
Expanding to Japan is a major goal for Coinbase, which has raised about $116 million in venture capital since graduating from the Y Combinator startup accelerator in September 2012. MUFG took part in Coinbase's most recent capital raise, joining with a venture fund in July to contribute $10.5 million.
Other Coinbase investors include BBVA, USAA and the New York Stock Exchange.
MUFG's partnership with Coinbase reflects the bank's attitude toward fintech startups more generally. Though some banks view them as competitors, Hirano said he would rather treat them as allies. "There are some areas where we compete with these newcomers, but I believe the space where we work with them is much larger," he said.
It may be that the immense size of MUFG is what allows it the luxury of tolerance; an oak tree need hardly feel threatened by acorns. But whatever the reason, among Japanese banks MUFG "has taken the lead" in creating a fintech strategy, said Neil Katkov, the senior vice president for Asia at Celent.
In addition to its involvement with Coinbase and R3, the bank has created a digital innovation division, sponsored a fintech startup challenge and opened its own startup accelerator. It has even partnered with IBM to develop smart contracts "for, appropriately enough, the bank's vendor agreements with IBM," Katkov said.
Unlike Americans, "consumers in Japan have been very passive about adopting digital financial services," which suggests that banks there will have to work harder to guide consumers to do so, said Katkov, who gave MUFG kudos for its efforts on that front.
Like many large banks today, MUFG also has an innovation lab or three — or, to use the bank's preferred term, a "digital transformation" lab. Hirano said MUFG has chosen to locate its lab in Tokyo away from its main office, so that workers there won't feel bound by standard codes of dress and behavior. He hopes this will foster more creative thinking.
"I gave them the mission to disrupt the incumbent banking business," he said. "'Be a disruptor' was my message to them."
Bonnie McGeer contributed to this report.
