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Citibank: Bitcoin Won’t Disrupt Payment Networks, but Changes Are Coming

Last Updated March 4, 2021 4:49 PM
Lester Coleman
Last Updated March 4, 2021 4:49 PM

Citi Research released a 56-page report on bitcoin saying that it is not going to disrupt banks or credit card networks. It says there will be increased transaction costs for bitcoin to provide increased volume. As for the use of bitcoin in remittance payments, it says bitcoin’s advantage dissipates when the “last mile” cost of converting to fiat currency is considered.

The report notes the growth of bitcoin mobile apps in developing countries but sees regulations rising that put them in question. It claims existing payment systems are generally efficient. The report also talks about Ripple and Ethereum as well as government-backed digital currencies. There is also an extensive summary of bitcoin’s legal status in different countries.

Despite these findings, Citi believes digital currency holds promise for financial services. It also believes government-backed digital currencies can disrupt existing payment systems, although these projects remain in a developmental stage and face a host of uncertainties.

Circle is cited as well positioned as global payment app. BitPesa is seen benefiting from an inefficient market for small businesses in Africa. Abra, while creative as a financial inclusion model, is threatened by regulatory compliance issues.

Decentralized Payment’s Real Benefits

The report claims a decentralized payment system will have limited benefits as an alternate domestic network in developing nations on account of the limited advantages of speed and cost against the the existing infrastructures.

The same issues are concerning for cross-border remittance payments.

Citi Research has done three previous reports on blockchain technology and concludes there are limited use cases for the peer-to-peer (P2P) value transfer on account of network adoption, scalability and a lack of a regulatory framework for dispute resolution.

It claims the best use for blockchain technology is where numerous parties to transactions must share information.

Where Blockchain Really Helps

The ability to evade third party intermediaries can bring cost savings for institutions that spend extensive resources reconciling data, the report notes. The best use cases are where the data is static as in supply chain management, mortgage title, and identity, since there are scalability limitations for blockchain solutions.

The two key components governing Citi’s views of payments are messaging and settlement, both of which are highly regulated.


Payment systems in developed nations are centralized, ensuring money can’t be doubly spent. Such entities include card networks, banks, online wallets and clearing houses. Decentralized systems improve cost and speed of transactions.

There has been an influx of new players into P2P payments such as PayPal, offering an advantage on the messaging side – the process of sending an instruction stating the amount of payment and the payee and payer identities – where they have a superior user interface.

Banks Launch ClearXchange

Citi is not certain the distributed ledger messaging platform brings a clear competitive advantage long-term since U.S. banks have developed a platform called ClearXchange that allows for real-time P2P payments.

As the U.S. moves to faster payment options like NACHA’s Same-Day ACH, The Clearinghouse’s Real-Time Payments and the Fed Faster Payments Task Force, the business case for a P2P network becomes even less clear.

In nations with no quality payments infrastructure, there could be some chance for an open decentralized network such as bitcoin.

One of bitcoin’s key features is immutability, but it is not certain if this is compatible with payments where changes to the ledger must be made, such as with chargebacks.

Messaging, Settlement And Regulation

Citi believes existing centralized systems are superior in the areas of settlement, messaging and regulation. The messaging system does not have significant room for improvement seeing as information transfer is already in real time.

On the settlement side, centralized systems have the benefits of speed, cost, scalability and resiliency.

Bitcoin Regulation

There is a misperception that bitcoin is frictionless, the report notes. While bitcoin transaction costs are negligible, there are costs to convert bitcoin to fiat. Bitcoin’s network is designed to shift from rewarding miners for minting bitcoins through transaction fees. But in time, these costs will be passed on to users through higher transaction fees.

Existing domestic payment transactions have costs, but not enough to warrant adoption of a new payment rail.

Digital Currency’s Challenges

Citi believes digital currencies could improve settlement speeds, but they require a widespread acceptance that is unlikely. Using currency as a bridge asset slows settlement since it necessitates re-entering fiat rails.

Scalability is a major issue for cryptocurrencies as they can only process a limited amount of transactions. Efforts to increase scalability could undermine security features that prevent double spending.

Resiliency is another factor. Existing systems are time tested. Bitcoin has only existed since 2009.

Regulation is also a factor. A new system will require major efforts to verify regulations to protect consumers. Bitcoin does not support chargebacks.

Remittances: Outlook Varies

As for the benefit of consumer-to-consumer remittances, Citi found leveraging a network like bitcoin can be more efficient in moving funds across different systems, but the “last mile” costs to convert to fiat currency are higher than the money transfer operator (MTO) models that benefit from global pools of liquidity. Prefunding transactions using local liquidity allows customers to get funds immediately. The MTO uses banking rails for post-transaction settlement.

Citi is not keen on the prospects for pure-play MTOs, but bitcoin is not the reason for this negative view.

MPesa teller


BitPesa has demonstrated the value of alternate rails in nations with poor cross-border payment infrastructure. But the challenges from gaining scale, brand awareness, know your customer (KYC) and anti-money laundering (AML) has pushed BitPesa to serving small businesses that were underserved in making cross-border payments.

Decentralized systems have promise for financial inclusion in markets with little access to traditional financial services. But mobile money has encountered limitations. Because it is a centralized payment system, wide acceptance creates utility, but it also gives the providers strong pricing power, resulting in high user fees.

Despite M-Pesa’s success in Kenya, mobile money adoption in other countries has not been as successful. In many nations, telecom firms compete by releasing their own mobile money systems that are not interoperable with each other.

Abra holds promise as a model for the unbanked. Abra positions itself as a software platform and not as an MTO since digital cash owners use the bitcoin network to process transactions. There is a question, however, of regulators taking action if the business gains scale.

If user adoption grows, there is a big opportunity for bitcoin in e-commerce where merchant acceptance can enable individuals to buy more efficiently.

Also read: Business schools partner with Citi, MasterCard in digital currency frenzy

New Models Can Evolve

Citi believes an open network like bitcoin, combined with machine learning, the Internet of Things (IoT), mobile, and big data, can develop new models.

A decentralized payment system can support programmable money and decentralized networks to provide on-demand computing power and the potential to boost efficiency by reducing machine idleness in exchange for fees.

A decentralized payment system can allow programs to make payments automatically for sensor data collection or accessing payable APIs.

Blockchain technology can enable the creation of smart contracts to allow appliances to barter for power use directly with the grid. Such payments are not possible currently due to the payment infrastructures not being designed to handle small, frequent payments.

Circle Could Change Financial Services

Citi believes Circle has a chance to be disruptive. Circle leverages mobile, machine learning and bitcoin to build a new model for financial services. While the revenue model is not clear, there is a chance to monetize the future through add-on services such as wealth management and lending.

Circle uses both traditional bank settlement and bitcoin functionality. Users can transact in national fiat currencies and bitcoin. It combines a high-quality app with an open payment network, placing itself in a strong position to acquire customers in the largest economic regions.

One of Circle’s valuable components is the development of machine learning and artificial intelligence techniques to leverage data collected on users and to predict the likelihood of fraudulent transactions. This negates the need for a big compliance workforce and reduces costs.

Digital Money Versus Digital Currency

The report goes into length discussing the differences between digital money and digital currency. Money today is largely digital, ranging from bank account balances to gift cards to payment apps.

Records of money today are digital. It exists as a set of ledger entries on databases. It moves via “digital messaging.” A messaging network allows a secure and standardized way to make changes to ledgers and settle transactions.

Venmo is a messaging app, but settlement occurs on bank rails. It has no dispute mechanism, so it should not be used for commercial transactions since the recipient is at risk if the sender cancels the payment.

Banks have developed products like Chase Quickpay, which is a free P2P payment app for customers and non-customers. Payments are available within minutes among customers and take days if non-customers are involved.

The top seven U.S. banks formed ClearXchange, a messaging platform that allows payments using a recipient’s phone number or email address. It is a centralized system like Venmo that makes messaging easier, but it relies on banks for settlement.

The challenge to a real-time payment system like ClearXchange is in adopting standards and managing risks, along with getting stakeholders to agree on a system.

The Federal Reserve has established Faster Payments Task Force to improve the payments infrastructure for all use cases. Where ClearXchange focuses on P2P, the Faster Payments Task Force could allow real-time payments for P2P, C2B, B2B, and B2B, but it will require a concerted industry effort.

Digital currency, unlike digital money, allows digital value transfer thanks to its decentralized nature. Clearing and settlement take place simultaneously and instantaneously. The cryptography wraparound ensures that only the holder of a private key can authorize a transaction. In the centralized model, an individual has to request a custodian to transfer funds, even when it occurs digitally.

Ripple And Ethereum

The report examines Ripple and Ethereum, two digital currencies  that are less established than bitcoin.

Ripple attempts to eliminate mining, which is energy intensive. Instead, it uses consensus, a way for the network to agree on the same ledger. Ripple transactions are faster than bitcoin’s. It was established for real-time interbank settlement.

Ethereum Ether

Ether is a digital currency with a specific use. It enables the Ethereum network to function by giving an incentive to the machines processing the smart contracts. It has a mining mechanism similar to bitcoin, but this is due to change in 2017.

Ethereum allows embedded smart contracts, unlike bitcoin. It provides a Turing-complete programming language allowing users to submit programs with their transactions. The miners verify the programs in exchange for Ether.

Since Ethereum has sophisticated language, it can allow decentralized applications, programs running on the network but not controlled by a single party.

The recent Decentralized Autonomous Organization (DAO) attack underscores Ethereum’s development issues. The DAO collects Ether from investors and allocates it for projects based on votes. The DAO attack exposed the vulnerability of smart contracts.

Central Authorities And Digital Currency

Central authorities issue virtual currencies that can be redeemed for fiat currency. Mobile money is an example. Banks have explored issuing coins backed by fiat currency.

Under central authorities, a blockchain-based token leverages P2P capabilities of a blockchain, but the value depends on a non-digital asset held off of the chain. This introduces counterparty risk for the issuing bank. Such tokens could trade at a discount if there are questions about the bank’s solvency.

Central authority-issued tokens differ from cryptocurrency in their reliance on a centralized issuer. The coins are effectively liabilities, unlike digital currencies where assets are issued by a decentralized network.

Mobile money is a virtual currency that telecoms issue that allows mobile customers to transfer funds over the network in a P2P manner. It can be exchanged for physical cash at agent locations. As adoption grows, it can be used for paying for goods and services. While it has succeeded in some countries, telecom companies control their own mobile money networks. This centralized approach has not succeeded in some countries due to lack of interoperability.

Government-backed digital currency could be very disruptive since it would allow non-bank entities to hold central bank accounts. Users could transact with each other with central bank money rather than commercial bank money.

Allowing non-bank entities to have central bank accounts would significantly increase competition in the banking industry. It would also remove the need to rely on commercial banks and fractional reserve banking for creating new deposits. Central banks would issue digital currency directly.

“Because of the momentous changes represented by such a shift, we believe that it will take many years of study before central banks implement a transition to digital currency,” the report stated.

Banks And Digital Currency

The Federal Reserve has not specifically announced a central-bank issued digital currency, but it has noted distributed ledger technology as a way to improve payment infrastructure as part of the Faster Payments Task Force.

The Bank of Canada is examining blockchain for interbank payments, but has no plans for any offering to the public.

The People’s Bank of China will try to deploy a digital currency, but it has not determined the technology to make this happen. The bank has said it will be crucial to retain control of monetary policy, and that there are non-negligible issues with efficiency and scalability.

China P2P Lending

The Bank of England is exploring blockchain. It has launched a fintech accelerator working with PwC on a distributed ledger proof of concept for payments settlement. Researchers have proposed a central bank issued coin, called RSCoin to allow the central bank to control the money supply but rely on distributed authorities to prevent double spending.

Remittances: Many Questions Ahead

The report explores in detail the methods of remittance. The main methods are bank account based transfers, cash-based transfers and digital-led transfers. There are also hybrid combinations such as account-to-cash where the sender has a bank account and the receiver gets the cash from an agent.

There are four main channels for sending remittances: MTO channel, digital channel, bank channel and Hawala (an informal channel.) Each of these has a variety of remittance methods and products.

The report includes a remittance pricing analysis comparing different channels. It noted that the market leader, Western Union, charges around 6% on average for transactions.

Banks are generally the costliest remittance option.

Transfer Frictions To Increase

The report examines sources of friction for money transfer, which it notes are driven largely by heightened compliance and regulatory requirements. These factors can increase cost and lower transaction speed.

Banks are becoming more risk averse due to the need to support consumer protection and evade terrorist financing. Because MTOs rely on banks to move and store funds, they have terminated accounts in certain nations.
As a result, consumers can be pushed toward unregulated and costly alternatives that don’t provide good consumer protection.

Bitcoin’s Remittance Challenges

In order for bitcoin to improve the remittance process, it must allow instantaneous end-to-end transfer beginning and ending in fiat. It must also provide the sender and receiver assurance and notice that the payment has been successfully completed. It cannot be more expensive than existing methods, and it must provide an intuitive user experience.

The report examined bitcoin with respect to cost, speed, transparency and client experience.

The source of remittance costs is not from the transfer of money but from KYC/AML, paying commissions to agents and customer acquisition. Big MTOs have the scale of their network that brings efficiencies.

While sending bitcoin is cost efficient, on- and off-ramps are still needed, limiting how low remitters can go in their fees, thereby limiting profits. The only service that facilitates remittance is an exchange in the country where the user wants to obtain local funds.

Bitcoin exchanges are needed to allow users to exchange currencies. The report noted the need to expand the number of bitcoin exchanges and it examined the factors involved in establishing bitcoin exchanges.

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