Virtual currency Bitcoin is not a subject that ever draws neutral reactions.
Against those who see the radical possibilities of a frictionless payment system designed for the internet, there is a growing resistance to the currencies that threaten existing business models and the perceived traceability of our current currency systems.
Leading the resistance against digital currencies are the banks, with the latest recruit to these ranks, Australian bank NAB, closing accounts of customers whose businesses are engaged in exchanging cryptocurrencies.
An Australian trader operating through LocalBitcoins.com and an another Australian Bitcoin exchange CoinJar have received letters from NAB informing them that:
digital currency providers pose an unacceptable level of risk, both to our business and reputation.
NAB joins banks in China such as the Agricultural Bank of China, that has moved to freeze the accounts of one of China’s larger Bitcoin exchanges, BtcTrade. Likewise, banks in Canada have already largely blocked accounts used for companies trading cryptocurrencies.
Mt Gox the tipping point?
It is easy to point to the recent failure of Bitcoin exchange Mt Gox and the subsequent law suits that have embroiled Japanese bank Mizhuo, as a catalyst for NAB’s move.
But if banks refused to service businesses after one or more of their kind went bust, they would not be left with very many clients. The risk assessed was also not one based on the companies involved, their operations or their clients, it was simply a matter of the business they were in.
While moves by banks to manage risk is something most customers would welcome, the global financial crisis showed us banks’ views of risk are highly selective and largely determined by the other part of this equation: the rewards. In terms of cryptocurrencies, the rewards to banks at present are very low. This is especially the case for a currency that is designed to largely cut them out of the picture.
Bitcoin and other digital currencies are designed to be exchanged directly between senders and receivers. This means that currently, transaction costs and bank fees can be avoided, so banks’ enthusiasm for supporting this industry or promoting it would be tepid at best.
The real risk to banks is perhaps then not that posed by customers using accounts to enable Bitcoin exchanges, but the threat to their bottom line.
NAB’s own senior currency analyst Emma Lawson has argued Bitcoin has many of the characteristics of regular currency, and that its potential to become a successful payment system it contingent on people’s continued belief in it. Clearly something that banks aren’t yet willing to see happen.
If banks are asked to justify their decisions purely on risk, they are likely to point to Bitcoin’s association with criminal activities. The rhetoric here has recently stepped up with the European police chief claiming we’re just seeing the beginning of Bitcoin’s use by criminal organisations.
Other than the clear use of Bitcoin as the payment system of illegal websites such as Silk Road, the use of cryptocurrencies as a proportion of the total value of money involved in crime is probably tiny. The United Nations Office on Drugs and Crime estimates that in 2009 the total amount of money involved in global criminal activity was US$2.1 trillion. The total market capitilisation of all cryptocurrencies is currently less than US$10 billion.
Cryptocurrencies may appear to be ideally suited to money laundering, but the problem is they eventually have to be exchanged for real currency, which immediately causes problems if you are trying to move large amounts of money. The second issue is the extremely volatile value of such currencies. There is a large risk that money with a certain value ends up being worth a lot less by the time it has been laundered and converted into a currency that can be actually put to some use.
Of the U$2.1 trillion that is involved annually in global criminal activity, most, if not all, will pass through banks at some point, and not surprisingly, will drive revenue for those banks. The idea then that digital currencies pose a larger theoretical threat seems somewhat absurd in comparison to the very real crime involving real currency.
Governments around the world have moved to deal with the lack of regulations on Bitcoin by either banning the currency outright, as in Thailand, or practising “masterly inactivity”, essentially delaying making any moves that might legitimise digital currencies and the industries that would then arise around them.
In this regulatory vacuum, banks have been able to protect themselves against the threat of the bankless payment system that digital currencies represent.