Many grand claims have been made for Bitcoin and other digital currencies. It is easy for critics to see them and scoff, but if digital currencies and peer-to-peer payment systems really do take off, even our wildest dreams could underestimate the ultimate potential outcomes. If you are old enough, think back to the early days of mobile phones, when video calls, directions to a destination and online shopping were all regarded as geek fantasies. There were even a few crazy voices proclaiming that phone photography could spell the end for some companies, possibly even giants like Eastman Kodak! That seemed ridiculous at the time and there were no shortage of people pointing that out, right up until Kodak declared bankruptcy in 2012.
Similarly, when proponents of Bitcoin have said that widespread adoption could herald the end of the banking business as we know it, some have laughed. How could some plaything of the computer nerds impact the biggest, most powerful industry of the modern era? One group not laughing, however, are the banks themselves. The high and mighty of Wall Street and the City have quietly embraced digital currencies, either by way of investing in the space or trading the currency itself. Now, the British Banking Association has said in a very direct way, that Bitcoin is a “…threat to the banking industry.”
Cynics from each side of the debate will no doubt draw different conclusions from that statement. It will be seen by Bitcoin’s early adopters as the kind of entitled whining that they expect from the banking industry; a thinly disguised plea for governments to strangle digital currencies by regulation. Opponents will see it as a dire warning; I mean, how could the world survive without banks? Sure, they suck some money out of the economy, but they make the world of commerce go round, right? Whatever one’s view of the statement, however, there is one fascinating question: Could it be true?
In theory, of course, it could. If everybody in the world started to use Bitcoin exclusively, nobody would deposit in banks and they would collapse, but nobody truly envisages that scenario. What has the industry worried is not so much Bitcoin as the blockchain. Banks are so used to taking a cut every time money changes hands that they cannot imagine life without that particular revenue stream. In 2013 the banks handled a staggering $410 trillion in non-cash transactions according to the Boston Consulting Group, and that number is expected to grow to $780 trillion by 2023. That’s an awfully big market that they are taking a slice of and the blockchain, as an ultra low fee competitor, has them worried.
Even widespread adoption of a digital peer-to-peer currency would hardly be a death blow. Transaction revenues, which are what the blockchain could eat into, totaled $425 billion in 2014. That sounds like a lot of money for simply facilitating the transfer of money. However, when you consider that Bank of America (BAC) alone saw revenues of $95.18 billion that year, you come to understand that skimming from our transactions represents only a tiny part of the revenue of banks worldwide.
While the widespread adoption of Bitcoin or any other altcoin will not lead directly to the demise of banking, though, it could lead to banks taking actions that make that a possibility. The thing about that $425 billion is that it is some of the only money that banks make that has zero associated risk and very little associated cost. There is no risk, and hardly any cost, in charging you $30 to receive a wire transfer, especially when the bank takes three days of interest on that money by delaying payment to you. If that revenue is removed or even seriously reduced, it will have to be replaced, meaning that a higher proportion of bank revenue will be coming from increasingly risky loans or trading. To see where that can lead we need look no further than 2008/9.
When the British Banking Association says that Bitcoin is a threat to banking, it would seem that they are, at least to some extent, just bleating. It may well be a threat to the easy money that banks currently take from you and me, but that doesn’t pose an existential threat to the system. The banks’ reaction to a reduction in that easy money, on the other hand, could be a different story.