Decentralized, math-based currencies can provide a framework for autonomous banking. To the average person that may not mean much, but to some the concept is enthralling.
Controlling money outside of incumbent systems is particularly exciting to cyberpunks and crypto-libertarians, yet the banks will, at some point, be working closely with bitcoin. A future where cryptocurrencies are a mainstream financial technology will likely depend on it.
Here are three different banks, with very different stances on bitcoin, that reveal just how contrasting the financial industry can be.
JP Morgan
The investment bank JP Morgan stands on the other side of the fence in regards to bitcoin. Recently that company released a report called “The Audacity of Bitcoin”.
From the title itself, it is not difficult to surmise what the organization thinks about the cryptocurrency. John Normand, the paper’s author, writes:
“As a medium of exchange, unit of account and store of value, it is vastly inferior to fiat currencies.”
Its advocates would say, of course, that bitcoin is still new, that it has room for growth as a digital payment mechanism and that every new idea faces a period of early adoption before heading into the mainstream.
Indeed, bitcoin is not as mature as the existing fiat financial system and weaknesses have exposed, especially recently. Yet it should be noted that innovation in bitcoin is moving forwards, and not backwards.
“If bitcoin stopped growing and changing, it would not have a real shot at becoming a widely used international currency,” says Andy Beal, who is an attorney with Crowley Strategy and helps advise early-stage companies.
The startup arena is currently seeing more new companies built around bitcoin – along with an increase in venture capital flowing into the ecosystem. Beal says:
“Unfortunately for JP Morgan, growth won’t stop. The bitcoin community and infrastructure will continue to get stronger and safer.”
The rise in bitcoin-related venture capital. Source: CB InsightWells Fargo
In January, the San Francisco-based bank Wells Fargo held a private meeting dubbed ‘Virtual Currency: Viability, Compliance and Direction’. The event, held in New York City, was at the offices of Union Square Ventures.
The venture capital firm has invested in bitcoin over the last year, providing funding for Coinbase in several different rounds: one led by the firm last May, and then the latest $25m influx of cash led by Andreessen Horowitz.
Union Square’s Fred Wilson recently wrote an article for CoinDesk. “I don’t have a problem with regulation per se, but how and when it happens matters a lot,” he wrote.
Wells Fargo appears to be interested in being an innovator in cryptocurrencies, but, as the title of its summit suggests, it has concerns about future regulation in the United States.
There is still potential for Wells Fargo to be one of the biggest banks to first embrace bitcoin, however.
Protected wallets are one service, for example, that could see banks succeed within the cryptocurrency realm.
Josh Siems is the founder and developer behind TrustedCoin – a company that provides third-party secure storage for bitcoin. He thinks it is likely that banks will soon join the bitcoin economy:
“In the future, I think we’re going to see banks like Wells Fargo offering bitcoin storage.”
Fred Wilson’s comment is revealing, however. At the moment, Wells Fargo wants more compliance guidance before it will enter the fray.
Projected bitcoin outputs over the next few years. As the value goes up and more BTC is in circulation, banks may become interested in storage. Source: Bitcoin WikiSilicon Valley Bank
The Silicon Valley Bank (SVB), based in Santa Clara, California, is an early synergist within bitcoin and banking. The company’s relationship with Coinbase allows US bank holders to easily acquire bitcoin. Verify a bank account with Coinbase, and it’s simple to move your USD into bitcoin and vice versa.
Right now the bank is actively involved with bitcoin business, but not proving storage services. Instead, the bank’s role appears to be as an ACH wire transfer provider.
“They’re not really storing [bitcoin] or anything. They are just basically getting comfortable having a relationship with a bitcoin company,” Siems said.
However, he sees SVB’s position as a banking innovator as a significant part of what makes it so successful. “They are branding themselves as the go-to bank for the whole investor community of the Bay Area,” he said.
The bank is taking a risk by working with bitcoin, but doing so will give it singular expertise on how to work within today’s unclear regulatory environment.
Fraud is one problem with cryptocurrencies, something that SVB is having to learn about.
“It’s really hard when you try to facilitate the exchange between two forms of money – one of which is reversible, and one of which isn’t,” said Siems
That is a challenge that the entrepreneurial SVB appears willing to take on, however.
Silicon Valley Bank locations. Many do not realize SVB has a global reach. Source: Silicon Valley BankBanking actions
Each of the banking entities above reveals a totally different mind-set concerning bitcoin business, and each for its own good reasons.
Banks, as enterprises, must align the emergence of cryptocurrencies to their business strategy, which is why bitcoin is seen through a prism that suits each institution’s future prospects.
It’s important for the bitcoin world to be aware of what the financial corporations do with virtual currencies going forward.
“As bitcoin continues to grow and more people use it in the future, it is inevitable that the banks are going to want to have ownership on the larger parts of that,” said Siems.
Bank of America’s positive report on bitcoin backs up that statement. And we can expect to see more of these analyses of virtual currencies published by the banks – they are an easy way for financial institutions to gauge the sentiments of both their customers and the public.
Furthermore, such reports show that a particular bank is at least paying attention, even if it doesn’t quite know what to do with these novel cryptocurrencies within existing monetary systems.
Fiat and bitcoin image via Shutterstock