people depositing in to get bitcoins and people withdrawing to get FIAT will create extra flow of FIAT cash for which banks will enjoy.
Until most people stop depositing bitcoins to get FIAT.
merchants will still need fiat to pay staff wages due to laws which concern contracted staff required to be paid in fiat at minimum wage or better.
even if merchants only transfer out of bitcoin to pay sales tax and employee income tax, and the employees then convert back into bitcoin again to ensure the taxes and laws are not broken... banks wont lose out. because they still see extra flow from account to account and they get use of it while it sits in bank accounts owned by exchanges.
that being said. the time if ever, that bitcoins get to such a mass appeal and usage for such a thing to occur, is not anywhere nearby.. it will take years/decades for such a thing to happen. you probably are never going to see a 90% or 50% of all transactions being bitcoin. probably only 1% use at best. which is still more then acceptable. currently out of 125k population known to be using bitcoins that is 0.0017857% of the 7 billion people.
so unless governments are taken over and the laws are abolished just treat bitcoin as something that is a voluntary and complimentary currency to work along side fiat. thinking you can over rule FIAT from an armchair will never happen, so just be happy that bitcoin is here and that it can work alongside fiat as a choice.
dont give up thinking bitcoin will never succeed.. even if only 0.018% (10x current level) world population used bitcoin that would make the market value of bitcoin multiply upto 10x the amount, due to more demand for coins.
but we dont need to think about that today. and if we did the first thing we would need to do is get gavin andersen to implement a new client that does not charge 0.0005 for fast moving coins with less confirmations.
bitcoin would be a victim of its own success before governments...
imagine 1.8% of population used bitcoin (1000x current value), wwhich is stil small enough to not be deemed a government threat. Todays $12 btc would be $12,000each, making someone that wants to purchase a small item for $1 use satoshi's (0.00008333 btc for $1). The 0.0005 client wallet fee would cost alot more then $1 so i hope gavin andersen is still around or other people to remove / reduce the transaction fees for fast transactions (not many confirms) or bitcoin will lose popularity for small daily use.
