At last year’s annual meeting of the Institute of International Finance, the association representing the global banking industry, a handful of themes dominated the conversation: the impact of financial regulation, the end of easy money, ways to jump-start sputtering growth in the advanced economies. This year, as the banking world’s leaders and hangers-on gathered at the Ronald Reagan Building in downtown Washington, D.C., those same themes were prominent once again. But one topic excited passions like no other: What should the world’s major banks “do”; about Bitcoin.
“Bitcoin developers are going to try and eat our lunch and that’s fine. That’s called competition, and we’ll be competing.”
question of what the banks should “do”; about Bitcoin presupposes that something needs to be done at all, which is still an idea worth questioning. Bitcoin is the most famous and successful of the cryptocurrencies, decentralized, distributed electronic money systems that use cryptography to secure and settle transactions. Its supporters are unsurprisingly bullish on its long-term potential, and the global payment system is the piece of the traditional banking industry most often seen as ripe for attack.
Marc Andreessen, co-founder of the $4.2 billion venture capital firm Andreessen Horowitz, said recently:
“Bitcoin offers a truly universal way to transfer value; which, if it succeeds, could unbundle the banks; and help re-implement the entire financial system as a distributed system as opposed to a centralized system. We can reinvent the entire thing.”
Interests of bitcoin community at this bankers meeting represented such well-known Bitcoin developers as Chris Larsen, CEO of Ripple Labs, Barry Silbert, founder and CEO of SecondMarket, Marc Andreessen, co-founder of the $4.2 billion venture capital firm Andreessen Horowitz.
In theory, the banks present themselves as big supporters of the idea of moving money in real time, securely, across borders, at little cost. But they vehemently disagree with the idea that Bitcoin and its associated protocols prov1ide the best channel to achieve that objective.
Chairman and CEO of JPMorgan Chase Jamie Dimon admits the inevitability of capital flight in digital space. But he doesn’t know what to do with it, and he threatens everone with regulations and prohibitions:
“The issue I have with Bitcoin is that it’s not about the technology – it’s about governments. When people form nations, one of the first things they do is form a currency. Are regulators and governments really going to foster Bitcoin over a long period of time? I think the answer is no.”
This is, of course, an argument based as much on emotion as anything else: The wager of Dimon and others in the industry is that the territoriality of regulators and sovereign governments will work to keep Bitcoin on the margins of the global financial system. And there’s another dimension: Bank leaders are betting that the innate human need for security and authority when it comes to the movement of money works so powerfully that most consumers will be uncomfortable with the idea of transacting across a decentralized, non government-backed payment network.
“We have to be respectful in the face of new technologies like Bitcoin, but we don’t capitulate; We adjust and take advantage. Consumers feel better putting their money with a brand they recognize; Bitcoin is a threat to the banks, but we have capabilities and resources that are very powerful.”
You could argue all day about how innovative the big banks really are. Jain noted that “in every core division we’re working on innovation,”; although “typically it starts with a client need being met in an unconventional fashion”; and it’s arguable that a process where clients take the lead has more to do with customer service and incremental technical advances than the kind of genuine, lasting innovation that has the power to shift market structures. Bitcoin supporters, not surprisingly, are disparaging of the banks’ ability to innovate, especially given the burdens imposed by post-crisis regulation.
“Two years ago I would have said the biggest obstacle to growth of Bitcoin was regulation, now I think it’s the biggest opportunity, but not the regulation of Bitcoin, the regulation of everyone else — that is stifling innovation.”
Bitcoin is not without famous backers: Andreessen, fellow venture capitalist Fred Wilson, of Union Square Ventures, and Bill Gates have all voiced support. Who will innovate best: the banks or the Bitcoiners? Will Bitcoin ever grow to the point where that competition will even become meaningful in the first place? None of this is clear. But watching the wild cats of technology circle the big game of finance should make for fascinating theater over the next few years.
For now, the debate is at a stalemate. Bitcoin innovators are supremely confident in the ability of their technologies to replace key components of the world’s financial infrastructure. And bank CEOs are supremely confident that no such thing will happen.*