Bitcoin & the Banks

[xavier]

Hi Guys

I have been doing a bit of thinking today and talking with a friend and wanted to express my view on Bitcoin, and ultimately get some feedback from you guys on it.

For this thing to really get popular, everyday users who know nothing about bitcoin and don't care about it either need to find it is cheaper for them to transact in bitcoins rather than normal currency.

That means that the benefit of bitcoin, ie. not having to go through 3rd parties, needs to be realised.

The reason why I think bitcoin has got potential to really do well is that businesses pay so much money to 3rd parties for transacting. Think about it: Every time a business accepts cards, it pays anywhere from 3-8% of the transaction value to the credit card company.

Businesses would kill to be able to avoid that.

However, here's the commercial problem with bitcoin.

(aside from the fact that governments probably won't like it for tax reasons).

Bitcoin is ultimately competing against some of the biggest and most interconnected institutions in the world: banks & credit card companies. Most of these companies are very closely connected.

Bitcoin unfortunately to work depends on banks. Why? Because users need to be able to convert their USDs/GBPs/EURs into bitcoin and then their bitcoins into USD/GBP/EUR. This can only happen if a bank is involved somewhere, either directly (through a bank transfer) or indirectly (through paypal/online payment processing).

Banks will not be happy about Bitcoin, due to the fact it competes with them.

Therefore they will not allow their customers to convert into Bitcoin. They will block the accounts of the biggest individuals or companies that are exchanging BTC to mainstream currencies. And yes there are a lot of different banks out there, but all the worlds banks are closely connected and I am sure they will ALL be in agreement that bitcoin is not in their collective best interests.

Not saying that Bitcoin will be extinguished: they will always be individuals who will convert BTC into currency via exchanges like MtGox. But there will never be one big company or institution that supports bitcoin conversion, and without that the currency cannot enter the mainstream. (ie. be used everyday for consumers, online or offline).

Bitcoin will always be useful for some things I believe, and it will still have value. But it is not going to change the world for this reason.

(BTW this ignores the fact that banks have huge political influence and will support any political attempts to block the advance of bitcoin.)

What do you guys think?

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[Gavin Andresen]

(BTW this ignores the fact that banks have huge political influence and will support any political attempts to block the advance of bitcoin.)

I think there's a good chance (mmm... 65.3%) that within 4 years one or more of the largest 1,000 US banks will support currency exchange to/from bitcoin for their customers.

Why would bitcoin be a threat to banks?  They're really good at securely handling currency; that's a valuable service, whether the currency is dollars or euros or bitcoins.

[xavier]

(BTW this ignores the fact that banks have huge political influence and will support any political attempts to block the advance of bitcoin.)

I think there's a good chance (mmm... 65.3%) that within 4 years one or more of the largest 1,000 US banks will support currency exchange to/from bitcoin for their customers.

Why would bitcoin be a threat to banks?  They're really good at securely handling currency; that's a valuable service, whether the currency is dollars or euros or bitcoins.

Because every electronic transaction that occurs in Bitcoins means less revenue for them, as they are not in the middle.

They might indeed gain from more FX conversions, and I guess they could charge fees for that, but I bet they stand to loose more from lets say "intermediatary fees" than they would gain from additional forex transactions.

Isn't that the whole point of bitcoin? That it frees users from the high fees embedded in the banking system?

Btw don't Bitcoins securely handle themselves? So there is no need for 3rd party security? Or are you saying that banks might offer to protect users' wallets for them?

[tomcollins]

(BTW this ignores the fact that banks have huge political influence and will support any political attempts to block the advance of bitcoin.)

I think there's a good chance (mmm... 65.3%) that within 4 years one or more of the largest 1,000 US banks will support currency exchange to/from bitcoin for their customers.

Why would bitcoin be a threat to banks?  They're really good at securely handling currency; that's a valuable service, whether the currency is dollars or euros or bitcoins.

Because every electronic transaction that occurs in Bitcoins means less revenue for them, as they are not in the middle.

They might indeed gain from more FX conversions, and I guess they could charge fees for that, but I bet they stand to loose more from lets say "intermediatary fees" than they would gain from additional forex transactions.

Isn't that the whole point of bitcoin? That it frees users from the high fees embedded in the banking system?

Btw don't Bitcoins securely handle themselves? So there is no need for 3rd party security? Or are you saying that banks might offer to protect users' wallets for them?

Gavin picked an interesting number in one of the top 1000 banks.  Now this is interesting from a couple of interpretations.  Does he mean *currently* 1,000 biggest banks?  Or does he mean a bitcoin bank will grow so big it will be in the top 1,000?  I'd assume he's talking about a company that currently is a top 1,000 bank.  But even then, the banking industry is interesting.  The big players have so much influence and power and a lot of the little guys- not so much.  So the little guys might be tempted to adopt Bitcoin because it gives them protection against the big guys.

A brick and mortar (or even online) bank that supports Bitcoins would be great for casual users, and a point of sale instant network would also be quite good.  Hell, if this really caught on, maybe banks would be the only ones that actually were running the software and we all just had interfaces to it and they still had some transaction fees, although much smaller.

[xavier]

(BTW this ignores the fact that banks have huge political influence and will support any political attempts to block the advance of bitcoin.)

I think there's a good chance (mmm... 65.3%) that within 4 years one or more of the largest 1,000 US banks will support currency exchange to/from bitcoin for their customers.

Why would bitcoin be a threat to banks?  They're really good at securely handling currency; that's a valuable service, whether the currency is dollars or euros or bitcoins.

Because every electronic transaction that occurs in Bitcoins means less revenue for them, as they are not in the middle.

They might indeed gain from more FX conversions, and I guess they could charge fees for that, but I bet they stand to loose more from lets say "intermediatary fees" than they would gain from additional forex transactions.

Isn't that the whole point of bitcoin? That it frees users from the high fees embedded in the banking system?

Btw don't Bitcoins securely handle themselves? So there is no need for 3rd party security? Or are you saying that banks might offer to protect users' wallets for them?

Gavin picked an interesting number in one of the top 1000 banks.  Now this is interesting from a couple of interpretations.  Does he mean *currently* 1,000 biggest banks?  Or does he mean a bitcoin bank will grow so big it will be in the top 1,000?  I'd assume he's talking about a company that currently is a top 1,000 bank.  But even then, the banking industry is interesting.  The big players have so much influence and power and a lot of the little guys- not so much.  So the little guys might be tempted to adopt Bitcoin because it gives them protection against the big guys.

A brick and mortar (or even online) bank that supports Bitcoins would be great for casual users, and a point of sale instant network would also be quite good.  Hell, if this really caught on, maybe banks would be the only ones that actually were running the software and we all just had interfaces to it and they still had some transaction fees, although much smaller.

This ignores the simple fact that the parties that bitcoin relies upon to succeed have the most to loose from bitcoin's success.

I'm not saying bitcoin isn't going to be more successful than it is.

But for businesses (online and offline) to take it seriously, it needs to be supported by mainstream banks not just by backroom dealers. And I can't really see that happening any time soon.

Am I just being too negative?

[marcus_of_augustus]

(BTW this ignores the fact that banks have huge political influence and will support any political attempts to block the advance of bitcoin.)

I think there's a good chance (mmm... 65.3%) that within 4 years one or more of the largest 1,000 US banks will support currency exchange to/from bitcoin for their customers.

Why would bitcoin be a threat to banks?  They're really good at securely handling currency; that's a valuable service, whether the currency is dollars or euros or bitcoins.

Because every electronic transaction that occurs in Bitcoins means less revenue for them, as they are not in the middle.

They might indeed gain from more FX conversions, and I guess they could charge fees for that, but I bet they stand to loose more from lets say "intermediatary fees" than they would gain from additional forex transactions.

Isn't that the whole point of bitcoin? That it frees users from the high fees embedded in the banking system?

Btw don't Bitcoins securely handle themselves? So there is no need for 3rd party security? Or are you saying that banks might offer to protect users' wallets for them?

Gavin picked an interesting number in one of the top 1000 banks.  Now this is interesting from a couple of interpretations.  Does he mean *currently* 1,000 biggest banks?  Or does he mean a bitcoin bank will grow so big it will be in the top 1,000?  I'd assume he's talking about a company that currently is a top 1,000 bank.  But even then, the banking industry is interesting.  The big players have so much influence and power and a lot of the little guys- not so much.  So the little guys might be tempted to adopt Bitcoin because it gives them protection against the big guys.

A brick and mortar (or even online) bank that supports Bitcoins would be great for casual users, and a point of sale instant network would also be quite good.  Hell, if this really caught on, maybe banks would be the only ones that actually were running the software and we all just had interfaces to it and they still had some transaction fees, although much smaller.

This ignores the simple fact that the parties that bitcoin relies upon to succeed have the most to loose from bitcoin's success.

I'm not saying bitcoin isn't going to be more successful than it is.

But for businesses (online and offline) to take it seriously, it needs to be supported by mainstream banks not just by backroom dealers. And I can't really see that happening any time soon.

Am I just being too negative?

Not only are you being too negative, you don't seem to get it either ... perhaps some more time in the reading room before grandiose pontificating?

It will be in the economic interest for some banks to adopt bitcoin as just another currency they can act as an intermediary on (not enough people trust bitcoin to roll-their-own right now but if an early adopter trusted/regulated bank was offering bitcoin-based products they would be wildly successful for reasons too numerous to mention here) .... after the first one does it, it is all gravy from there on.

[MoonShadow]

And it doesn't really have to be an actual bank to start the trend.  If Wal-mart starts accepting Bitcoins, even just for their site-to-store purchases, then every one of their compeitors is going to have to follow suit quickly.  If Target does it first, Wal-mart might be able to resist for a while longer.  But once any major retailer such as these try it, resistance from the banking industry would be counter productive for their continued existance.

[marcus_of_augustus]

http://www.youtube.com/watch?v=WZEJ4OJTgg8

we are botcoin .... you will be assimilated .... RESISTANCE IS FUTILE .... your life as it has been is OVER



hahahahahaha!

[gusti]

This is a peer to peer currency, is it too disruptive to think of a world without banks ?

[MoonShadow]

This is a peer to peer currency, is it too disruptive to think of a world without banks ?

The basic nature of a bank is bound to change somewhat, but the core concept of a bank as an institution that lends deposits out for interest is unlikely to change.

[gusti]

This is a peer to peer currency, is it too disruptive to think of a world without banks ?

The basic nature of a bank is bound to change somewhat, but the core concept of a bank as an institution that lends deposits out for interest is unlikely to change.

Today nature of banks migrated more to a services model : payrroll accounts, atm's, electronic banking.
All of that can be covered easily with btc, peer to peer lending included. 

[PLATO]

You'll just be able to go to the bitcoin ATM on the corner, put in cash, and get bitcoins. Or, meet your local dealer f2f and pay cash.

[MoonShadow]

This is a peer to peer currency, is it too disruptive to think of a world without banks ?

The basic nature of a bank is bound to change somewhat, but the core concept of a bank as an institution that lends deposits out for interest is unlikely to change.

Today nature of banks migrated more to a services model : payrroll accounts, atm's, electronic banking.
All of that can be covered easily with btc, peer to peer lending included. 

True, but Mybitcoin.com is almost a bank already.  There will still be a role for bitcoin banks.

[BitterTea]

Keep in mind that there is no lender of last resort for Bitcoins. If a Bitcoin bank practices fractional reserve banking, and there is a run on that bank, they will have to either borrow reserves from their peers, or go out of business. There can be no federal reserve to create more coins to cover their liabilities. I think any potential banks supporting Bitcoins will be acutely aware of this fact.

[asdf]

Keep in mind that there is no lender of last resort for Bitcoins. If a Bitcoin bank practices fractional reserve banking, and there is a run on that bank, they will have to either borrow reserves from their peers, or go out of business. There can be no federal reserve to create more coins to cover their liabilities. I think any potential banks supporting Bitcoins will be acutely aware of this fact.

just like the gold standard days. Free market banking is back!

[uniman]

There is zero chance governments are going to tolerate this once it grows beyond a certain scale.  Their power to tax and control your lives rests upon their iron grip on money and banking. Their squeals about "criminals" using this system divert your attention from the fact that tax resisters are also "criminals" in their mind.  Bitcoins, and other variations of this theme give people a chance to store value and transact business outside the government's control.  Governments will hate this and do everything they can to crush this.

Therefore this is a great idea.  Give Uncle Sam (and his inbred kin folk) all over the world, a big fat middle finger and keep on truckin'.  Crash the $, crash other fiat money, and maybe, just maybe, you'll achieve liberation.

[xavier]

Thank you all for the replies to my post. I am rather new here, so I probably have mis understood some things. I come from a background in finance, and so am probably lacking some of the technical knowledge of Bitcoin. But I have read a bit on the idea, and find it very interesting. I hope that I may be able to bring some perspective from that industry to the community.

OK - let me respond to your posts!

It will be in the economic interest for some banks to adopt bitcoin as just another currency they can act as an intermediary on (not enough people trust bitcoin to roll-their-own right now but if an early adopter trusted/regulated bank was offering bitcoin-based products they would be wildly successful for reasons too numerous to mention here) .... after the first one does it, it is all gravy from there on.

My thinking is that it will be in the collective interest of all banks not to support Bitcoin. Even if some perhaps smaller banks would gain more from FX, the big players will act politically to seal them off from the global banking system if they make serious moves to adopt Bitcoins as part of their business models.

And it doesn't really have to be an actual bank to start the trend.  If Wal-mart starts accepting Bitcoins, even just for their site-to-store purchases, then every one of their compeitors is going to have to follow suit quickly.  If Target does it first, Wal-mart might be able to resist for a while longer.  But once any major retailer such as these try it, resistance from the banking industry would be counter productive for their continued existance.

Governments are very strict on regulation of the financial services industry. My thoughts are that they would have a problem with a retailer accepting bank deposits. Some key unanswered questions: Why would Walmart accept Bitcoins if none of their consumers use them? And why would consumers use them if they don't have a bank which they can use to obtain them? And how is Walmart going to convert the BTCs they receive into hard currency without mainstream banks?

This is a peer to peer currency, is it too disruptive to think of a world without banks ?

I am sure anything is possible. We only have to see what has happened in the last few years with the credit crunch, Lehman etc.
However, my thinking is that there has to be a logical route for it to happen.

Today nature of banks migrated more to a services model : payrroll accounts, atm's, electronic banking.
All of that can be covered easily with btc, peer to peer lending included.  

This would rely on widespread adoption of Bitcoin

You'll just be able to go to the bitcoin ATM on the corner, put in cash, and get bitcoins. Or, meet your local dealer f2f and pay cash.

I am not saying that you will not be able to meet a local dealer and exchange. But for widespread adoption, you need a mainstream dealer.

Keep in mind that there is no lender of last resort for Bitcoins. If a Bitcoin bank practices fractional reserve banking, and there is a run on that bank, they will have to either borrow reserves from their peers, or go out of business. There can be no federal reserve to create more coins to cover their liabilities. I think any potential banks supporting Bitcoins will be acutely aware of this fact.

Bitcoin has some real advantages over existing currencies. I seems in essence to be a better business model for a currency. But there are many 'better business models' that never became reality because of politics.

Governments power to tax and control your lives rests upon their iron grip on money and banking. Their squeals about "criminals" using this system divert your attention from the fact that tax resisters are also "criminals" in their mind.  Therefore this is a great idea.  

Yes I can't help thinking this is true as well. Governments rely on control of the banking system for their income, which allows them to exercise control over society. Whilst governments would probably be able to tax in Bitcoin, I think that the negatives for government combined with pressure from the banking system would over-ride any positive arguements for Bitcoin's adoption.

Please let me know your thoughts on the above. It is probable that I am being too negative. I await your comments!

[marcus_of_augustus]

Not so much negative as willingly close-minded perhaps. If you are a product of the current dysfunctional, weak, financial system then anything new will be a threat I suppose.

I can't see it being anything less than a crap-fight for the ages ... choose your side wisely is my only advice to those who are part of the current failed financial order, who have been raping it off the top for way too long, I might add.

E.g, clamping down on Joe Couch playing poker in his pyjamas is not winning any friends in the hearts and minds battle.

[MoonShadow]

And it doesn't really have to be an actual bank to start the trend.  If Wal-mart starts accepting Bitcoins, even just for their site-to-store purchases, then every one of their compeitors is going to have to follow suit quickly.  If Target does it first, Wal-mart might be able to resist for a while longer.  But once any major retailer such as these try it, resistance from the banking industry would be counter productive for their continued existance.

Governments are very strict on regulation of the financial services industry.

Yes.  And that will persist for as long as they can maintain it.  However, Bitcoin is regulation resistent, and international by design.  There is really no way to effectively enforce any regulations that the market would deem to be oppressive or unneccesary.

My thoughts are that they would have a problem with a retailer accepting bank deposits.
Some key unanswered questions: Why would Walmart accept Bitcoins if none of their consumers use them?

Some of their consumers already do use them.

And why would consumers use them if they don't have a bank which they can use to obtain them?

For the same reason that Walmart's have tax, finance and money transfer services inside the store.  Because Walmart is only a small step from being the bank itself.  Walmart can still accept cash in person, but walmart's online and international presence are no small part of their business model.

And how is Walmart going to convert the BTCs they receive into hard currency without mainstream banks?

I know that Sears functions as it's own bank.  I'd say that Walmart is more than big enough to do the same if they wish.  Walmart is certainly large enough that they don't need a bank to stand in for them to do currency conversions.

[cypherdoc]

read this:  http://docs.google.com/viewer?a=v&q=cache:Z1aK2cAnWl0J:siteresources.worldbank.org/AFRICAEXT/Resources/258643-1271798012256/M-PESA_Kenya.pdf+m+pesa+in+kenya&hl=en&gl=us&pid=bl&srcid=ADGEESgK0nQlLli7vxzi-IYwiVHQCR1cUKh-tciYKhqVGfJbrxwKC-DBDc8odwykJCw992IoPfeb20FWvmOP3pgJwR77vH-nNXLGsyjrEQyNquQG0OICPLPKNRURYyXwFXK-sHhywgLC&sig=AHIEtbQSonmhImIIxylKfUzWNTF6jqQkCA&pli=1

in Kenya, the banks, credit card industry have been effectively shut out of the majority of tx's in the country by M Pesa.  whodathunk it possible?  BTC brings this concept to the rest of the world.