For the last couple of years, bankers and financial gurus all over the world have been trying to predict where the banking industry is going. We’ve all heard about the “digital wallet.” There’s Google Wallet, MasterCard’s PayPass Wallet, Square Wallet, Lemon Wallet, PayPal and more.
But while everyone was making their predictions, a pseudonymous developer named Satoshi Nakamoto introduced a decentralized digital currency in 2009 that is based on an open-source, peer-to-peer internet protocol. In a little over three years, the value of that currency, called Bitcoin, has grown to over 1 billion in U.S. dollars. Forbes announced today that the currency’s value has risen from $13.50 to $100 in just the last three months.
On Friday, March 29th Fox News reported that this currency has surpassed 20 national currencies in value – and I’m willing to bet that many in the American banking community have never even heard of it!
My son, who is in his twenties, has been telling me about his “investment” in Bitcoin for years. His explanation on how this currency works went in one ear and out the other. Today he asked me if I knew what was going on in Cyprus.
After trying to impress him with all I’d learned from reading the Wall Street Journal, he informed me that his investment had doubled in value over the last few days because of what was going on in the small island country.
The fast growth of this currency has even attracted the attention of the United States Treasury Department, who just enacted new rules to regulate Bitcoin and other virtual currencies, making it subject to the same level of scrutiny as other forms of currency.
The problem for the Fed is that the developers of this currency have made tracking very difficult.
I decided to research “Bitcoin” and got a quick lesson in virtual currencies. I found out that Bitcoins can be exchanged by a personal computer or smart phone through a “wallet” file or website. You don’t need an intermediate financial institution – just software.
Sounds a lot like Google Wallet, minus the need for a financial institution. And since the banks in Cyprus are all shut down or limiting cash withdrawals, thousands of people are exchanging what money they have left for digital currency.
This just shows what happens when people lose faith in their country’s banking system. We can all see what happened to our economy after the FDIC went around shutting down banks and what our Federal Reserve has done in controlling the U.S. dollar.
Two weeks ago the world watched with amazement as Cyprus banks took money out of people’s hard earned savings accounts. But isn’t that what happens to many of us in America when our Federal Reserve adjusts the interest rates or buys up mortgage bonds? With Bitcoin, there is no central authority to regulate or manipulate the monetary base.
Since I work with a lot of banks and credit unions, I’m very familiar with all of the compliance information that financial institutions are required to give their customers.
Could you imagine using this Bitcoin “compliance” copy I retrieved from Wikipedia to explain your bank’s services?
Bitcoin does not operate like typical currencies: it has no central bank and it solely relies on an internet-based peer-to-peer network. The money supply is automated, limited, divided and scheduled, and given to servers or “bitcoin miners” that verify bitcoin transactions and add them to a decentralized and archived transaction log every 10 minutes. The log is authenticated by ECDSA digital signatures and verified by the intense process of bruteforcing SHA256 hash functions of varying difficulty by competing “bitcoin miners.” Transaction fees may apply to new transactions depending on the strain put on the network’s resources. Each 10-minute portion or “block” of the transaction log has an assigned money supply. The amount per block depends on how long the network has been running. Currently, 25 bitcoins are generated with every 10-minute block. This will be halved to 12.5 BTC during the year 2017 and halved continuously every 4 years after until a hard limit of 21 million bitcoins is reached during the year 2140.
Doesn’t this make you want to take all the money you have hidden in your mattress and go buy some Bitcoins?
So, is Bitcoin a bubble, a well disguised Ponzi scheme, or is the world really ready for a decentralized currency? Only time will tell.
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Neal Reynolds has worked with hundreds of banks and credit unions around the country helping them to grow core deposits and market share without growing their marketing budgets. Contact him at [email protected].
