Bitcoin vs banks: future cooperation or opposition?

Bitcoin is having a particularly turbulent 2017 so far. The planet’s largest cryptocurrency has reached new all-time highs in the lead up to US Securities and Exchange Commission (SEC) ruling on a proposed BTC exchange traded fund (ETF), earlier this year. Following the rejection of the fund, the price dropped suddenly before recovering briefly.

Further uncertainty over the scalability of the currency more recently has caused the price of a BTC to plunge again ($1033 per Bitcoin on March 27, according to bitcoin exchange CEX.io) but the very latest trends at the time of writing suggest that the debate over block-size – for the layperson the number of transactions possible at any one time – has cooled off. At least for now, that is.

Of course, all those supportive of the cryptocurrency would love to see some form of widespread adoption soon. A growing movement to see a “cashless” planet, and the inherent advantages of bitcoin over current banking practices (particularly those relating to transfer times and costs) make the digital currency a potentially attractive avenue for global banking giants to explore.

Bitcoin could absolutely revolutionise the infrastructure of our banks, providing a cheaper, faster, and more convenient alternative to the likes of wire and single euro payment area (SEPA transfers, if given the chance to do so. However, it is unclear at this moment whether its full potential in the banking sphere will ever be realised. There are many negatives about the currency that banks would have to overcome, or ignore, to fully integrate their systems with the new technology.

Banks are certainly interested in BTC and blockchain technology

There is no doubt that many banks are very interested in bitcoin. Global banking think-tank Citi Research issued a report in June 2016, entitled ‘US Digital Banking: Could the Bitcoin Blockchain Disrupt Payments?’, stating that “digital currencies are better equipped to open up new markets and reach new customers”; however, it also goes on to claim that “today’s centralised payment systems are already efficient enough for today’s commerce”.

The report continues, raising important points about the impact of BTC and other digital currencies could have on markets where payment systems are lacking. These emerging economies could quickly benefit from the lack of infrastructure required to use the currency. While certainly not a one-sided coverage (the shortcomings of BTC that Citi Research found are detailed later in this article), the report does mention the potential for “radically new [banking] models” coming in the not-too-distant future, based on innovations like bitcoin, combined with “mobile, machine learning, big data and the Internet of Things (IoT)”.

Additionally, Japanese banking giant the Mizuho Financial Group has just announced that it is nearing completion of an exciting new project using the bitcoin blockchain for securities transfer. Mizuho has shown great interest in the technology surrounding BTC recently, and has even invested capital in bitFlyer, Japan’s largest bitcoin exchange.

While exact details of the Mizuho research are unclear at present, a spokesperson for the institution stated that there were plans to continue studying bitcoin and blockchain technology and the advantages such systems can have over traditional banking methods.

Bitcoin’s shortcomings

However, despite pockets of interest on bitcoin from the banking sector, large obstacles to widespread bitcoin adoption remain. The Citi Research report goes on to make some interesting observations on the perception of bitcoin from the banking perspective.

The document states that “immutability, or the incorruptibility of bitcoin’s blockchain”, isn’t necessarily “well-suited for money movement”. It then continues by highlighting the high cost of changing fiat currency into bitcoin and vice versa, and to point out that the “proof-of-work” confirmation method working on bitcoin would mean an ever-increasing transaction fee would be levied on transfers as miners demand greater payment for their work, considering the increasing difficulty of successfully mining blocks.

Future of bitcoin with banks?

While it’s been established that banks are lagging the rest of the world in terms of technological innovation (in 2017 should it really take such a large percentage of the transfer amount and so long to send funds from one country to another?), it seems unlikely that bitcoin itself will be the innovation that revolutionises the banking industry.

There are already several banks across Scandinavia and elsewhere that are working towards a “cashless” future, with some form of digital currency taking the place of banknotes. Additionally, a group of four banking sector giants of are in the process of creating their own form of blockchain token to facilitate monetary transfers.

Clearly, these ideas take cues from the forefather of blockchain technology, bitcoin, but perhaps the lack of control, and decentralised nature of the asset makes BTC too much of an unknown quantity to integrate into the banking world proper. From their point of view, it would make very little sense to build systems around a protocol that requires global support from its end users to make changes to the way it works.

Take today’s block size debate, for instance. If a similar change was sought from the banking sector, it would not be implemented unless there was sufficient support among the miners to make the change to the network. This lack of control is something alien to global banking powers, and is, as such, an unattractive quality about the cryptocurrency for the purposes of banking.

To conclude, it seems that the technology that powers bitcoin, the blockchain, has great support among many of the banking world’s top brass. However, it appears unlikely that any of the world’s major banks will integrate the actual currency itself with their current methods of operation.

While most agree that banking reform is necessary and inevitable in the future, they seem reluctant to fully secure their colours to the bitcoin mast. The lack of central control deemed by many as bitcoin’s most attractive asset naturally puts the banking elite off. Moves to create tailored banking cryptocurrencies highlight this fear of the unknown.

One thing is certain, the inefficiencies of today’s banking practices will form the impetus for change within the sector. However, the vehicle used is much more likely to be some form of bank-created cryptocurrency which allows complete control, rather than bitcoin itself.

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