Bitcoin: Friend or Foe to Banks?

Bitcoin has been in the news quite a bit in recent weeks, as interest in virtual currencies seems to be ramping up by the day. News arose this week that New York plans to regulate Bitcoin and other digital currencies, which strikes at the very heart of why so many find digital currencies appealing: because they are not tied to any government, reserve bank, or regulatory authority.

On the other hand, the dark side of Bitcoin also reared its head this week, as the CEO of a Bitcoin exchange was arrested on money laundering charges.

But perhaps the most interesting aspect of Bitcoin and other digital currencies is the debate it is eliciting in banking circles about its potential role in affecting the banking industry.

Wells Fargo hosted a Bitcoin summit in New York this past week entitled "Virtual Currency: Viability, Compliance and Direction," and the bank has expressed interest in exploring the viability of digital currencies and how (or if) banks should approach them. On the other hand, JPMorgan Chase CEO Jamie Dimon derisively demised virtual currencies as a passing fad in an interview this month.

Some industry experts, however, do think banks should keep an eye on Bitcoin and other virtual currencies. Matthew Friend, managing director for Accenture Payment Services, North America, said that while digital currency is in its infancy, as they evolve the significant operational, risk management and regulatory differences between virtual currencies and existing payment systems will become clearer. Most importantly, Friend says, conventional actors like financial institutions, clearing houses and central banks may not necessarily be required for virtual currencies to work; also, virtual currencies are not bound to a specific country or currency area, which complicates regulation and enforcement, he notes.

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"The value of virtual currencies like Bitcoin is that they provide a universal payment system," Friend says. "Payments can be made immediately, anytime, anywhere, and at no, or very low cost. In short, they can be a cheap and safe payment mechanism if used properly. While virtual currencies are currently limited to on-line transactions, the future of these currencies may expand beyond on-line activity. Further, the current Bitcoin model decouples payments from bank accounts, thereby providing security and privacy through a different design. It is important to note, however, that the differences between real and virtual currencies cut both ways. While virtual currencies address some of the design differences of existing payment mechanisms, the ability of virtual currencies to operate outside of the current financial system opens them to abuse."

While at the moment bank payments systems are not immediately threatened by virtual currencies, Friend notes that Bitcoin, along with many other non-traditional competitors in the payments space, may eventually threaten bank revenues derived from payments.

What do you think: Is Bitcoin a a passing fad, or viable payment mechanism in the future?

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio