The banks would NOT have to temporarily convert currency into bitcoin. I could see them sending blocks of fed notes (1,000,000's 100,000's 10,000's) with marked satoshi's/colored coins. Of course they would still have to pay transaction fees with bitcoins. I believe it would still be bullish from Bitcoin being acknowledged. It just would be a way more subdued trip to the moon since they would not need a billion dollars of bitcoin to transfer billion dollars of fed notes just a few marked satoshi's.
Can you please elaborate on how the block chain can be used to send fed notes (or other non BTC transactions) without using actual bitcoins?
with a coloured coin implementation all you need is a global standard that a red satoshi = 0.01, a blue satoshi = 0.1, a green satoshi - $1, then by sending 3 satoshis you can send $1.11. And if I mkae a purple satoshi $1,000,000,000, I can send $1,000,000,000 with 1 satoshi.
But that is by the by, Banks will NOT use bitcoin unless they can get themselves comfortable with receiving bitcoins from unknown parties, or ensure that parties identify themselves - ie meet money laundering regulatory requirements.
What banks will much prefer is a closed loop system where they act as gateways and send IOUs around a distributed ledger amongst parties they trust (sound familiar). Banks don't care that they are trading IOUs and fractional reserving - that's what they do anyway.
Now that system is in many ways inferior to bitcoin, so bitcoin will continue to exist, but it will give the banks enough instant transaction and cross border ability that for most sheep using bitcoin will be too much hassle for not enough saving.
