Worlds apart: banks and Bitcoin convergence unlikely anytime soon

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Banks remain disinterested or wary of Bitcoin but there is a growing acknowledgement that the digital currency’s popularity cannot be overlooked indefinitely, if a recent gathering of the faithful is anything to go by. From trade to settlement, Bitcoin offers plenty of opportunities – and threats – for banks.

At a recent Docklands conference, it was standing-room only as hundreds of people gathered at One Canada Square to listen to the latest developments in the world of Bitcoin. It was an incredible turnout, for a currency that most people in the room would not have heard of a year or two before. Yet, with the imposing towers of Canary Wharf – home to London’s banking community – visible out of the window, the people who work in them were conspicuous by their absence. The room was long entrepreneurs, investors and journalists, but short bankers. Their absence illustrates banks’ ambivalence towards Bitcoin, a feeling that is reciprocated – and then some – by the Bitcoin community. Zach Harvey, co-founder of Lamassu, showcasing his Bitcoin ATM machine, summed up the mood. When asked why his machine would only convert notes into bitcoins, and did not accept debit cards, he responded: “I didn’t want to have to deal with the banks.” There is a feeling among many in the cryptocurrency community that the banks are part of the ancient regime that will ideally be swept away by the rising tide of Bitcoin. Speakers and delegates were united by the view that Bitcoin represents a new financial paradigm, making existing financial infrastructure and practices obsolete. In a deflationary world of finite capital, there will be more pressure on those deciding how that capital is allocated. If quantitative easing (QE) has been the main weapon in the war on economic contraction, Bitcoin proposes unilateral disarmament mid-battle. It is a scary thought, but for those who subscribe to the view that using this weapon does more harm than good, it is less scary than continuing down the path of QE. “Bitcoin is the most disruptive thing to happen to financial systems for decades,” says Nick Shalek of Ribbit Capital. Creating something entirely new allows for a greater level of innovation than trying to build on existing infrastructure, he says. Bitcoin is a currency but it is also a payment network, and its value in the latter function is “an order of magnitude or more higher” than its market cap as a currency, estimated at around $1.5 billion, says Tamás Blummer, CEO of Bits of Proof, a technology start-up that allows its clients to harness the power of the Bitcoin network. The ability to create rules for a Bitcoin trade, for example transacting with two separate organizations at once and stipulating the funds can only be accessed by both together, allows people to create their own trustee agreements. Letters of credit, used in trade finance, could easily be replaced by Bitcoin as the banks, lawyers and other middlemen are dis-intermediated, says Blummer, a former investment banker. “Bitcoin will eliminate many of those hurdles that are only there to create economic activity where there isn’t a real need for it,” he says. The Bitcoin community can be divided into three groups, says Shakil Khan, angel investor and founder of Coindesk: anarchists who see Bitcoin as a way to bring down the system; idealists who lack business experience; and capitalists who see an opportunity to make money but have little interest in the ecosystem surrounding Bitcoin. The ideal Bitcoin start-ups would have a mix of the latter two groups, he says, but anarchists are not people an investor would be comfortable having running a company. Some explicitly believe both sides must learn to live with – even love – each other for either to thrive. Others – such as Ripple – are consciously positioning themselves as the future bridge between the Bitcoin and financial communities. This will be evident if and when banks start coming on to the Ripple system as gateways, as they are ultimately expected to. A number are known to be considering such a move, though they are neither showing their cards yet, nor are expected to make a move imminently. The problem is they do not fully understand Bitcoin, and therefore are unable to quantify the risks. It is easier to just sit on the sidelines until they understand it better. However, it is a misunderstanding to equate their seeming lack of interest with antipathy. “There will always be a need for banks to make loans and ameliorate credit quality,” says Blummer. “If they are clever they will embrace the technology, not oppose it.” However, he fears this is not happening. “It is natural that illegal industries are leading the way – there is nowhere more competitive than the black market,” says Blummer. “But as more merchants learn about Bitcoin, that will force the banks to pay attention. They will follow their clients.” There might be some limited scope for taking deposits of bitcoins and lending, but the peer-to-peer nature of the market means borrowers will be more likely to appeal directly to investors. If payments and trading is free, banks will not earn commissions as the gateways to exchanges. There is potentially an opportunity for Bitcoin to simplify interbank trading and settlement. And Bitcoin could also be a leveller among the banks themselves. Bitcoin provides small banks lacking a global footprint with access to a free, global settlement system of the quality only top-tier banks would previously have been able to afford. Banks will, therefore, have to be creative and open-minded in how they approach Bitcoin, conceiving new ways to serve their clients. “There will be untold opportunities for financial institutions in this market once it grows,” says Ribbit’s Shalek, for example in hedging instruments to manage volatility. “Banks will be important for Bitcoin, and some are already thinking about how they can get involved,” says Jered Kenna, CEO of Tradehill, a virtual currency exchange. But, he concedes, “integration is going to be the hardest part of this process”. Eventually, both sides are going to have to learn to get along.