Bitcoin: a threat to the transaction banking industry?

By:
Rebecca Brace
Published on:

Transaction bankers should wake up to the competitive threat that is Bitcoin, which, in theory, offers a multitude of benefits for multinational companies. Nevertheless, an information deficit and regulatory concerns will continue to temper corporate adoption of the digital currency, analysts say.

Launched in 2009, Bitcoin, this year, has achieved global ascent, tapping into concerns over capital controls, a loss of confidence in the banking system, and fears over the integrity of the G7 money supply as central banks expand their balance sheets.

The currency is not controlled by a central bank or government. Bitcoin is used to make peer-to-peer payments and there are around 11 million bitcoins in circulation.

As the use of bitcoins has surged in recent months, the currency has experienced substantial volatility: the price of a bitcoin increased from $15 in January 2013 to $266 in April, a rise which has been attributed in part to the crisis in Cyprus and the impact of consumers losing confidence in the banking system.

However, what goes up can also go down: the price of a bitcoin crashed from $266 to $105 in a single day, and stands at around $128.

While Bitcoin is in its infancy, as the currency matures it could challenge the world of transaction banking in a fundamental way.

Chris Skinner, chair of the Financial Services Club
“If a business wanted to move money around the world for nothing, you could do that in bitcoins,” says Chris Skinner, chair of the Financial Services Club. “If you actually needed any currency, you could just trade them back into euros or dollars. So the advantage for a corporate is that they could suddenly move out of the banking system and do everything for free.”

Such a model could have enormous advantages for multinational corporations. These companies often struggle to overcome the issue of trapped cash, which can be difficult to repatriate from highly regulated markets. The prospect of being able to avoid bank fees by transacting outside of the banking system is also attractive.

For banks, the possibility of widespread corporate adoption of Bitcoin or another digital currency is unlikely to be welcomed: if banks have no role to play in the transaction process, they would be redundant.

However, Jon Matonis, board director at the Bitcoin Foundation, says some banks might decide to aim for a first-mover advantage by supporting the currency. “A lot of global banks already have footprints in many economies and are ideally set up in a lot of cases to operate as FX brokers,” he says. “It’s not inconceivable that they would be able to add another currency code to what they are already doing.”

Matonis adds that by embracing Bitcoin, banks would effectively be “giving a platform for their ultimate competition – but that doesn’t mean there’s not money to be made there.”

With current volatility levels and concern about further regulatory enforcements, Bitcoin is unlikely to become a mainstream payment option for large corporations in the near future – but that day could be coming.

“People don’t yet trust the actual unit of exchange,” says Skinner. “That’s going to change, and it might not be Bitcoin – it could be another currency – but Bitcoin is the first true secure encrypted currency that is easily exchangeable worldwide, which is why it is taking off.”

Still, Bitcoin faces regulatory pressures, which will also temper the pace of corporate adoption of the currency.

US authorities announced on Tuesday they had shut down Liberty Reserve, a digital currency system based in Costa Rica, claiming the company was being used to run a $6 billion money-laundering scheme.

The company had more than a million customers and had been in operation since 2006. Users had to provide their name, address and date of birth but the details could easily be fabricated.

An indictment filed in the US District Court for the Southern District of New York claims Liberty Reserve had “become a financial hub of the cyber-crime world, facilitating a broad range of online criminal activity, including credit card fraud, identity theft, investment fraud, computer hacking, child pornography, and narcotics trafficking”.

Accounts were frozen and domain names seized, while five men, including its founder, have reportedly been arrested.

The regulatory attention could be a source of concern to those using other digital currencies, such as Bitcoin, the most successful example. Unlike Liberty Reserve, Bitcoin operates on a decentralized basis and even the name of its founder, Satoshi Nakamoto, is a pseudonym.

Jon Matonis, board director at the Bitcoin Foundation
Matonis at the Bitcoin Foundation says regulatory scrutiny is focusing on Bitcoin exchanges, rather than on payments. “The exchange is where the digital currency meets the national political currencies, such as dollars, euros and pounds,” he says.

“Ancillary Bitcoin businesses and services continue to operate without being overly regulated, but the exchanges which convert bitcoin in and out of the other currencies are the target of enforcement.”

One that has come under fire recently from regulators is MtGox, the world’s largest Bitcoin exchange. The exchange’s account held with payment processing network Dwolla was frozen earlier this month by the US Department of Homeland Security (DHS).

According to a seizure warrant released by DHS, paperwork completed when the account was opened identified Mutum Sigillum LLC, a subsidiary of MtGox, as a “business not engaged in money services”. The warrant states that the paperwork indicates the company “does not deal in or exchange money, and that it does not send funds based on customer instructions”.

However, despite the regulatory scrutiny, Bitcoin has recently been on the receiving end of a substantial amount of venture capital investment. Earlier this month, the founder of accelerator fund Boost VC launched the Boost Bitcoin Fund to invest in Bitcoin start-ups which graduate from the accelerator programme.

The currency has also been backed by the Winklevoss twins, famed for suing Facebook founder Mark Zuckerberg, who claim to own around $11 million-worth of bitcoins. Matonis observes that the current wave of investment might help Bitcoin companies to meet domestic regulatory hurdles.