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.