At last year’s annual meeting of the Institute of
International Finance, the association representing the global
banking industry, a handful of themes dominated the
conversation: the impact of financial regulation, the end of
easy money, ways to jump-start sputtering growth in the
advanced economies. This year, as the banking world’s
leaders and hangers-on gathered at the Ronald Reagan Building
in downtown Washington, D.C., those same themes were prominent
once again. But one topic excited passions like no other: What
should the world’s major banks “do” about
Bitcoin?
Bitcoin developers “are going to try and eat our lunch
and that’s fine,” said
Jamie Dimon, chairman and CEO of JPMorgan Chase, speaking
on the panel of bank honchos that kept the pundits here
entertained as they tucked into their catered lunch of quinoa
salad, braised kale and overcooked salmon. “That’s
called competition, and we’ll be competing.” But
it’s not yet clear that the banks will be. To ask the
question of what the banks should “do” about Bitcoin
presupposes that something needs to be done at all, which is
still an idea worth questioning.
Bitcoin is the most famous and successful of the
cryptocurrencies, decentralized, distributed electronic money
systems that use cryptography to secure and settle
transactions. Its supporters are unsurprisingly bullish on its
long-term potential, and the global payment system is the piece
of the traditional banking industry most often seen as ripe for
attack.
Marc Andreessen, co-founder of the $4.2 billion venture
capital firm Andreessen Horowitz, said recently that Bitcoin
offers a “truly universal way to transfer value”
which, if it succeeds, could “unbundle the banks” and
help “re-implement the entire financial system as a
distributed system as opposed to a centralized system. We can
reinvent the entire thing.”
But the travails of Bitcoin, from its association with Silk
Road, the now-shuttered online emporium for hard drug
transactions, to the bankruptcy and collapse earlier this year
of
Mt. Gox, at one point the largest Bitcoin exchange, are
well documented, and the currency’s price has fluctuated
wildly over the last 12 months (although it’s worth noting
the overall uptrend in the price of a single Bitcoin, which
today is worth $355 from $125 a year ago). Regulators are now
starting to look at ways to control digital currencies such as
Bitcoin more closely. The IRS has suggested Bitcoin miners, who
add transactions to the “block chain” or public
ledger that is the cryptocurrency’s core piece of
infrastructure, may be subject to capital gains tax. In July,
Benjamin Lawsky, the superintendent of the New York State
Department of Financial Services (NYDFS), unveiled a proposed
scheme for the licensing and regulation of Bitcoin which has
generated an at times excitable debate during its still-open
public comment period.
These developments together mean that many in the financial
industry are less fearful of Bitcoin’s power to disrupt
their dominance of the traditional global payments universe
than might be thought. Bitcoin, it seems, is being tamed. Anshu
Jain, co-CEO of Deutsche Bank, pointed to the music, retail and
media industries, all of them witnesses to major change over
the last decade, as counter-examples to illustrate the
financial industry’s special immunity to external
disruption. “Why has that disruption not happened in
finance?” he asked. “There’s a very
straightforward reason: regulation.” If cryptocurrency
operators “want to take retail deposits,” he added,
“they would have to change their culture.”
Of course, it’s not clear that “taking retail
deposits” is an objective or ambition of Bitcoin at all.
When Bitcoin’s supporters speak of the potential of the
cryptocurrency, it’s less as a replacement for
conventional money or as an alternative banking system than as
a way to remove the costs and inefficiencies associated with
the global correspondent banking system, the complex network of
protocols and standards that allows money to be moved across
borders. “This is the first time you’ve had an
internet for value exchange,” Chris Larsen, the CEO of
Ripple Labs, a San Francisco start-up with a distributed, open
source payment protocol, told the conference. The emphasis for
his company, he added, is less on building a new currency than
a “global wire” for payment transfers which could
eventually remove the need for correspondent banks, the large
financial institutions that provide much of the world’s
cross-border payment plumbing. “The real problem is the
time and expense to move value across borders and FX risk -- we
think these technologies can fundamentally solve these
problems,” he said.
In theory, the banks present themselves as big supporters of
the idea of moving money in real time, securely, across
borders, at little cost. But they vehemently disagree with the
idea that Bitcoin and its associated protocols provide the best
channel to achieve that objective. “I agree with real time
digitization,” Dimon said. “The issue I have with
Bitcoin is that it’s not about the technology -- it’s
about governments. When people form nations, one of the first
things they do is form a currency. Are regulators and
governments really going to foster Bitcoin over a long period
of time? I think the answer is no.”
This is, of course, an argument based as much on emotion as
anything else: The wager of Dimon and others in the industry is
that the territoriality of regulators and sovereign governments
will work to keep Bitcoin on the margins of the global
financial system. And there’s another dimension: Bank
leaders are betting that the innate human need for security and
authority when it comes to the movement of money works so
powerfully that most consumers will be uncomfortable with the
idea of transacting across a decentralized, non
government-backed payment network.
Larsen and other Bitcoin boosters present the lack of a
central monetary authority as the great strength of the new
generation of distributed, peer-to-peer payment systems; the
banks think that’s their biggest weakness. “You have
to be respectful in the face of new technologies like Bitcoin,
but you don’t capitulate,” said James Gorman, CEO of
Morgan Stanley. “You adjust and take advantage. Consumers
feel better putting their money with a brand they
recognize.” Bitcoin is a threat to the banks, he added,
but “we have capabilities and resources that are very
powerful.”
You could argue all day about how innovative the big banks
really are. Jain noted that “in every core division
we’re working on innovation,” although
“typically it starts with a client need being met in an
unconventional fashion,” and it’s arguable that a
process where clients take the lead has more to do with
customer service and incremental technical advances than the
kind of genuine, lasting innovation that has the power to shift
market structures. Bitcoin supporters, not surprisingly, are
disparaging of the banks’ ability to innovate, especially
given the burdens imposed by post-crisis regulation. “Two
years ago I would have said the biggest obstacle to growth of
Bitcoin was regulation, now I think it’s the biggest
opportunity,” said Barry Silbert, founder and CEO of
SecondMarket, a Bitcoin exchange. “But not the regulation
of Bitcoin, the regulation of everyone else -- that is stifling
innovation.”
Bitcoin is not without famous backers: Andreessen, fellow
venture capitalist Fred Wilson, of Union Square Ventures, and
Bill Gates have all voiced support. Who will innovate best: the
banks or the Bitcoiners? Will Bitcoin ever grow to the point
where that competition will even become meaningful in the first
place? None of this is clear. But watching the wild cats of
technology circle the big game of finance should make for
fascinating theater over the next few years. For now, the
debate is at a stalemate. Bitcoin innovators are supremely
confident in the ability of their technologies to replace key
components of the world’s financial infrastructure. And
bank CEOs are supremely confident that no such thing will
happen.
Follow Aaron Timms on Twitter at @aarontimms.