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Matthew Goldman, Wallaby
Matthew Goldman, Wallaby

Will Banks Wake Up to the Competitive Threat of Bitcoin?

Banks can help prevent disintermediation by digital currencies by providing faster payments.

To hear its proponents, Bitcoin is the biggest thing since the World Wide Web, and 2014 is the year the digital cryptocurrency will break into the mainstream. Bitcoin’s supporters emphasize its three core features: anonymity, safety from hackers, and direct (peer-to-peer) relationships.

If this sounds a lot like another currency, you are right, it is -- the good old United States Dollar (also known as "cash"). Cash is also anonymous, cannot be hacked (it's a physical good!) and can be used in peer-to-peer relationships without an intermediary. Cash has its share of problems however: If it's stolen it can be very hard to recover, it's hard to move around in large quantities, and if you want to return an item you are offered little in the way of protections.

Matthew Goldman, Wallaby
Matthew Goldman, Wallaby
The currencies diverge in some important ways. Example -- it can be easier to move bitcoins around electronically. Additionally, while bitcoin is anonymous in terms of the account owner (at least until you try to convert bitcoin to another currency), all of the transactions are public. If cash were this public you would know what I make, and how much I pay for my mortgage!

The peer-to-peer nature of Bitcoin also limits purchase security. One benefit of financial intermediaries like banks and regulators is that they can help you when things go wrong. Your MasterCard or Visa card ensures you carry zero liability for bad merchant behavior and fraud. Bitcoin and cash have no such guarantees.

Yet, banks in the US are leaving a gaping hole for Bitcoin. Here, banks protect traditional lines of revenue by making digital cash transfers very slow. They don't need to be. We have the technology today to move cash around instantly. You can do this in smaller amounts via PayPal, Square Cash, Venmo, Ribbon, and a host of other startups when you move digital funds from one account to another. You can digitize cash at the point of sale and use it to pay bills or load other accounts via networks like Green Dot's MoneyPak retail load network, Visa ReadyLink, MasterCard rePower and via PayNearMe.

[For More On Faster Payments: Real Time Payments, Real Time Risk]

Despite the real-time support of these limited use cases, it is still hard to move larger sums from account to account in real time. Dwolla is working on this at a few financial institutions, but for the most part you must pay a high fee for a wire transfer (which can still take hours), or a lower fee to move money via ACH. One problem -- ACH transfers take one to three days -- they are how you receive direct deposits like your paycheck or withdrawal funds from your PayPal account to your checking account.

The banks are exhibiting classic market leader behavior as outlined in the seminal work from Clayton Christensen's The Innovator's Dilemma. They are protecting their current revenue streams and allowing a new entrant to come in with a product that may not be substantially better, but demonstrates some innovation at a much lower cost.

Banks are change-adverse organizations, both by culture and through regulatory requirements. They could easily close off Bitcoin's ascendance as a new currency by moving to real-time money transfers. If they don't wake up to the threat, it's possible the regulators will beat them to it. Instead big banks have been putting up hurdles to real time payments.

The Federal Reserve Bank recently completed public comment on the future of the US payments system. It recognizes that the right approach for the economy and for the security and priority of the US Dollar is a same-day, or real time money transfer capability, and it will push banks to achieve this in the next few years.

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No one wants to dismiss Bitcoin. It could be the next big thing (there are a lot of quotes about how dumb early Internet naysayers look!). It would be foolish to bet your house however, on a new currency that, while fast, doesn't offer a lot of benefits over cash. The story of the future of money is more likely to be defined by how the Internet is being truly integrated by big financial institutions that have decades of experience securing and managing our money than by a decentralized cryptocurrency.

Matthew Goldman is the CEO of Wallaby.

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