Big Banks Are Confident in the Face of the Bitcoin Threat

October 10, 2014

Aaron Timms

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.