How Can Banks Take Part in the Bitcoin Gold Rush?
Quick history question for you: Who got rich in the famed California gold rush back in the mid 1800s? It certainly wasn't John Sutter or many of the thousands of prospectors. Of course, some speculators struck it lucky and made piles of money, finding gold on Sutter's own land. But who were the biggest beneficiaries of the gold rush? Merchants and those providing the services to merchants and speculators alike, namely banks.
Most people know about Levi-Strauss and the denim empire built on the back of the gold rush, but many other merchants made money by providing a valuable service in a remote, distant land. Apparently, a single egg back then would cost $25 in today's money, and to get your daily caffeine fix would cost $100 for a pound of coffee! But, what does this have to do with banking and Bitoin and digital/virtual currencies?
[For more of our Bitcoin coverage, check out: Why Some Retailers Are Accepting Bitcoin]
Well, just as the settlers developed a commercial system with the available tools, merchants and banks of today can combine forces by leveraging Bitcoin to create an efficient e-commerce system. Actually, that's a bit misleading. More specifically, albeit a little confusing, they can leverage the public ledger technology found in crypto-currencies to create new payment systems and services.
I previously wrote about the concept of direct, real time any-to-any connections; this solves the consumer problem and would potentially cut out the middlemen and toll takers in the consumer payment transaction. However, there are many other use cases that can be identified that would benefit from public ledger technology: business-to-business payments, corporate cash concentration and government payments, to name a few.
So could something be built using the public ledger technology to provide a more secure, less complex payment system? What would the transaction cost be? What are the risks? What are the benefits? All great questions that are eagerly awaiting answers... I'm sure by some of you as well.
Also known as the distributed ledger, this allows a payment system to operate in a decentralized way with no central bank. Many exist, with the first and most famous being Bitcoin. The goals of such a system are long run price stability and driving transaction costs close to zero. The big challenges in the current design of a system like Bitcoin are that there are intentionally no intermediaries in the system to process the payments, and there is a delay in the decentralized network to confirm the transactions, a delay being 10 minutes. The transaction itself is immediate. The confirmation takes the additional time, and the confirmation exists to protect against "double spend."
Additionally, each incremental transaction becomes more difficult to validate and confirm, thus it needs more and more computing power. This could lead to two things:
1. The benefit of validating the transactions is less than the cost of the computer power needed to do so.
2. If this happens, external incentives or fees will be needed to be paid to validate the transactions, driving up transaction costs.
So although Bitcoin was a stroke of genius with great intentions, there are some flaws in the flannel that make it difficult to achieve its goal. Will the 21 millionth coin ever get verified So the currency itself may not be the answer to producing a more secure and frictionless payment system, but the technology behind it might. What do you think?
Paul McMeekin is a big believer in the power of payments and how electronic payments can change the world. He currently heads up the business intelligence and market research function at ACI, a large global payment software provider. Previous roles at ACI include product ... View Full Bio
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