Fiat government money is one of the biggest profit centres for banks globally. Even though we are all human, to trade and interact with each other requires the exchange of different coins, paper, and electronic credits. Each one of these transactions benefits banks who move money globally for a fee.
At the most simplistic level, the trading of crypto currencies and or digital tokens is just a standard foreign exchange transaction. If banks love foreign exchange, why then do they have an aversion to Bitcoin and other digital currencies?
Banks claim to care about optics, and say they abhor risk to their reputation. Yet – time and time again they’ve shown that they will gladly launder money for dictators, arms dealers, and drug lords. Why the aversion to conducting standard FX transactions involving digital currencies?
Banks also are not scared of breaking laws – but only so long as every other bank is doing it too. When it comes to a new business line that might be controversial to regulators, it is better to be a close second than the first. If meaningful punishment meted out to the first mover is lacking, the rest of the banks will follow headlong like lemmings.
Digital currency trading on-exchange volumes are too big to ignore. Given the level of fees charged to eager traders and speculators, the leading exchanges post revenue figures that value them in the billions of dollars using standard exchange revenue multiples.
The funny part is that a bank is necessary to operate a fiat to digital currency exchange. The on-ramp into the digital currency space requires the exchange to hold client fiat money with a bank. While the bank makes transaction fees on the movement of fiat, they miss out on the very profitable churn generated by digital currency exchange clients.
Hundreds of millions of dollars in fees will be made this year by the leading exchanges. The board of any bank that banks a digital currency exchange should be ashamed of themselves for not expanding their operations and offering, at a minimum, Bitcoin to fiat exchange services.
Throughout history, bankers have been held in low esteem. The handling of money is viewed as unclean, while rentier landholders are given the trappings of aristocracy. However the plebes, patricians, and governments still trust banks with their money.
Bank offices exude confidence, grandeur, and – most importantly – security. Contrast that to a slick and minimal website of a digital currency startup. Their airy San Fran, New York, or London offices don’t produce the same effect on potential customers.
The lack of trust between users and exchanges due to hacks, thefts, and a lack of business acumen is one of the largest reasons people don’t take the first step to acquiring some Bitcoin. Through generations of social conditioning, people believe a bank is the best place to store wealth. If your friendly neighbourhood bank offered the ability to buy, sell, and store Bitcoin directly, trust – and therefore trading volumes – would be much higher.
Senior bankers appear to be catching on. A Barclays executive recently asked the FCA in London to figure out how a bank can join the party. [CNBC]
A wink and a nod from the appropriate alphabet letter agencies will set off a stampede for banks to open their own exchanges. The next question will be: buy or build?
Banks fail miserably at cyber security. Bitcoin, in many cases, does not require physical proximity to where it is stored in order to steal it. In the long run, the real differentiating feature in the exchange landscape is security. Banks that don’t want to “learn” how to conduct proper cyber security should buy the leading exchanges to whom they currently extend banking services – if they can find a trustworthy one.
The conversation between a bank and exchange will be very simple. Either the bank can buy out the exchange at a very generous multiple, or the bank will close the exchange’s accounts, and make it very difficult for the exchange to obtain an account with another organisation in a particular domicile.
As banks slowly come around to the revenue generating potential that a fiat to digital currency exchange offers, traders will abandon exchanges not explicitly owned by a bank. Banks already have millions of hungry financially repressed customers to whom they can immediately offer digital currency trading. The liquidity will immediately shift to bank-backed exchanges.
Exchanges who have fought valiantly through the nuclear winter of 2014 and 2015 may not wish to sell out to the banks they loathe. Exchanges who can tap traditional VC funds or the ICO market should purchase struggling banks.
With a bank and its licenses as cover, existing exchanges can continue to innovate faster than an incumbent large bank.
Yes, it’s likely we’re in a bubble. While the price of many digital currencies are likely to decline in the short-term, banks are now acutely aware of this new asset class. News stories about legacy banks “thinking” about how to offer digital currency trading to their clients will become more common.
I am extremely confident that by 2H2018 there will be a large storied bank that offers Bitcoin trading and storage to its customers. The stampede of Johnny-come-lately banks into the digital currency exchange space will be exciting to watch.