Amidst the storm that China’s supposed ban on Bitcoin brought, Swiss global financial outfit UBS released a paper on Bitcoin entitled Bitcoin and Banks: Problematic currency, interesting payment system. Interesting title to say the least.
In a thirty-six page report, UBS takes an in-depth look at Bitcoin and how it affects today’s financial systems.
“In principle, Bitcoin works very well as a sort of secure digital token system – ‘cowrie shells in the sky’. However, as a stable store of value and unit of account, Bitcoin clearly struggles, and there is no obvious remedy given the impossibility of regulating the money supply to stabilise Bitcoin-denominated prices. As well as breeding volatility, even in an optimistic scenario this provokes deflationary pressure. This problem is compounded by the lack of a real ‘Bitcoin economy’.”
UBS also looks at the impact virtual currencies have on banks. It’s obvious they have been paying close attention to the ECB’s statement earlier this week. UBS agrees that Bitcoin does not pose a threat because of its small volume compared to other currencies. Although there’s truth in this opinion, it seems naive to disregard Bitcoin as a threat.
“In practical terms, we find it unlikely that Bitcoin (or something similar) could pose a threat on a systemic scale – not least because existing authorities would have to get involved, but also because of Bitcoin’s various failures as a currency (discussed above). In sum, disintermediation would require an alternate, price-stable store of value, and Bitcoin – and digital currencies in general – have failed in this regard, thus largely mitigating this risk.”
In one way, it can be positive that Bitcoin is not deemed a worthy competitor to the dollars and euros of this world. The cryptocurrency is not ready to be a big player yet. The advantages of the system are clear, the surroundings need to mature. The failure of Mt. Gox is one of the prime examples of this.
Of course, being a billion dollar company, UBS would like to take its share of the Bitcoin profits.
“Taking this sort of ordinary financial servicing one step further, banks could also start offering elementary hedging products to businesses that deal in Bitcoin or another digital currency – contingent on being allowed to do so by regulation. This would be particularly helpful for businesses in the context of Bitcoin’s volatility, which currently forces a lot of businesses to convert to fiat currency at the end of every day. These products would be a marginal source of fee revenue, but could equally turn into a threat if banks find themselves unable to create such a swaps market (e.g. due to regulation). If (and this is a big if) businesses were to start dealing with digital currencies in significant volumes, a third party or new entrant could offer the required hedging services. Ultimately, however, at those volumes a business would require fairly sophisticated hedging and financing services, which a bank would be best placed to provide and the regulator would have to get involved in any case.”
When there’s money to be made, banks will always be there to show their ugly faces. Perhaps a prominent member of the Bitcoin community should also make a paper, stating all that is wrong with the banking system. Thirty-six pages might not be enough for that one…
Last modified (UTC): April 20, 2014 18:34