What Bankers Should Know About Bitcoin

By Elizabeth Frasier-Nelson - [email protected]

Move over fiat money, here comes Bitcoin, or so the current hype would have us think.

Over the past couple of months, Bitcoin’s sharp price fluctuations have created a lot of buzz about the crypto-currency and its feasibility as a bona fide digital currency. Since Bitcoin is independent from government regulation, some people believe that the whole financial landscape may be about to permanently change.

But, should you worry or rejoice over Bitcoin? Here’s what everyone needs to know!

For starters, Bitcoin can be a bit confusing, even for a seasoned financier. It is a digital currency (or crypto-currency) that you can use to purchase goods and services online.

However, unlike the normal currency you’re used to, the Bitcoin system is decentralized. It is powered and managed by its users, rather than a centralized national or international entity, such as a bank.

Defined from a user point of view, Bitcoin is ‘Internet cash’ – a form of digital currency you use online. It is used nearly the same way you use offline cash denominations.

The Bitcoin network operates on the crypto-currency concept. It is based on the idea of creating a new form of currency that is geared and managed through cryptography, rather than through a central bank.

Satoshi Nakamoto published the first proof of concept and specification for crypto-currency in 2009. Although he left the Bitcoin project prematurely, more developers have since joined. The project has grown exponentially in scope and stakeholders over the last few years.

Bitcoin’s open-source nature has led to many concerns, most of which are unjustified. For example, although the core software and protocols are openly available to developers for modification, the system is deemed secure. There have been several high profile news stories where millions of dollars worth of Bitcoins have been stolen, however these thefts have been from platforms that take payment in or operate as an exchange for Bitcoin, such as the Silk Road II and MT Gox. The thefts have not been from the Bitcoin network itself.

The creators of Bitcoin intended it to enable instant and secure online transactions or fund transfers without the bureaucracy, constraints, and charges that typify the normal transfer processes found in banking institutions.

In the past year, the use of Bitcoin in online transactions has increased steadily. You can now find hundreds of online merchants that accept Bitcoin as a payment option. It is especially popular with users who want to ensure online anonymity.

Currently, the Bitcoin network is not under any singular ownership, much like no single person or company owns email. Although there are numerous developers improving the core software, they cannot implement any changes in the Bitcoin protocol because users freely choose the software version they want to use.

Bitcoin is an app that provides a digital wallet containing Bitcoins that can be used for online transactions.

Behind the scenes, the Bitcoin network runs on a public ledger, known as the block chain. This ledger is comprised of all the transactions that have gone through the Bitcoin network. Consequently, a user’s computer can verify whether a transaction is valid by querying this ledger. Digital signatures are also used to authenticate each transaction. 

To acquire Bitcoins, you can purchase them at a Bitcoin exchange using normal currency or you may simply exchange with someone. You can also acquire Bitcoins through Bitcoin mining.

Bitcoin’s value is not static. It varies with people’s demand. As a result, it can fluctuate when people wish to make online transactions.

Initially, Bitcoins were only used for the purchase of goods online and for the transfer of funds. As their popularity and value rapidly increased, people started incorporating Bitcoin as an asset in their investment portfolio; albeit, a high risk asset because of its volatility.

With time, more and more people started using the digital currency for investment and savings. Eventually, Bitcoins were traded on standard platforms, spiking the digital currency’s price to $200, and then again to $300. As expected, the bubble quickly burst, although few had anticipated that it would burst so soon.

At that time, many dismissed Bitcoin and labelled it no real threat to fiat currency. Moreover, since people wrongly percived the digital currency’s supply as infinite and there was no centralised issuer and controller, many in the financial world quickly dismissed Bitcoin entirely.

By the end of 2013, Bitcoin’s price exploded once again, reaching an all-time high of $1200. Although price swings continue, Bitcoin has caught the attention of big investors, financiers and bankers. As of yet, no high-profile investor has nailed their flag to the digital currency mast.

Currently, Bitcoin has no major financial function. As a result, it does not appear to be a serious threat to fiat currencies. Paper currencies have value by government fiat. Since we live in a government controlled world, it’s hard to see how Bitcoin will eliminate paper currencies as we know them. That is not to say that Bitcoin has no value; it has, of course, demand value.

Bitcoin’s first major advantage is user control. There are no banks, no limits, and no borders. You can send and receive funds at any time you wish; anywhere in the world.

Also, there are minimal fees attached to payments, typically to facilitate priority transaction processing. In some cases, there are no fees at all.

The transparency and neutrality of the system allows for trust among users. In addition, the Bitcoin core is cryptographically protected, so no one can modify or manipulate the network. 

Finally, Bitcoin can be used anonymously online. So, if you want to increase your privacy, you may use Bitcoins wherever they are accepted.

On the downside, Bitcoin can be used to purchase illegal items online, such as drugs. All a person needs do is buy Bitcoins using cash. This is a legal action. Then, the person can use the Bitcoins to purchase whatever he or she wants anonymously online. The seller of the goods can complete the transaction anonymously, as well. Lastly, the Bitcoins are converted back to normal currency.

Another downside is that Bitcoin is not readily accepted by many online businesses. Moreover, many people are not aware of the existence of Bitcoin, let alone know how it works.

All in all, it remains to be seen whether Bitcoin will grow into a viable, alternate currency. Currently, it has little effect on traditional payment and investment mediums. How long will be the big question? 


By Carter Dougherty     [email protected]

Regulators have pressured banks to close some Bitcoin-related accounts.

Bitcoin, the digital money created as an alternative to currencies controlled by nations and banks, is finding that its wider adoption depends on both as governments in China and the U.S. demand enthusiasts play by existing rules.

Bitcoin exchanges, payment processors and other startups say they need banks to connect them to the existing payments system and provide basic services like checking accounts. To do that, the fledgling companies must convince the regulators who police the banks that Bitcoins aren’t being used to conceal illicit activity.

“Banks are scared to deal with Bitcoin companies, even if they really want to,” said Stephen Pair, co-founder and chief technical officer of BitPay Inc., an Atlanta-based company that processes payments for merchants in Bitcoin. Pair said BitPay has relationships with banks in the U.S., Canada and Europe; he declined to name them at the banks’ request.

Regulators show little sign of losing interest in tracking financial flows, be they in dollars, renminbi or Bitcoin. China’s central bank yesterday barred financial institutions from buying and selling the virtual currency and from pricing products in Bitcoin, sending prices tumbling more than 10 percent, according to the CoinDesk Bitcoin Price Index, which synthesizes prices across major global exchanges where Bitcoins can be traded for traditional currency. Its value stood at $1,052.25 at 5 p.m. New York time.
Photographer: George Frey/Bloomberg

A pile of Bitcoins.

Prices jumped last month when a Department of Justice official described the currency as “a legal means of exchange.” Still, another regulator at the same event warned that Bitcoin-related businesses would need to meet current money-laundering standards before banks would agree to work with them. Central banks in the Netherlands and France have also warned that the currency has no government guarantees.
Accounts Shuttered

Regulators have pressured banks to close some Bitcoin-related accounts. Tradehill Inc., a San Francisco-based exchange, shut down in August after its bank, Internet Archive Federal Credit Union, dumped Bitcoin-related clients for what it called “regulatory issues.” U.S. officials also shut down an account at Wells Fargo & Co. used by Mt. Gox, a Japan-based exchange, to service U.S. customers.

Introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto, Bitcoin is the most prominent of a group of virtual currencies -- money that exists mainly as a string of code -- that have no central issuing authority. Today, despite its unclear status, Bitcoin can be used to pay for t-shirts, food or an appointment with a Manhattan psychiatrist.
Niche Market

Bank reluctance to host accounts for Bitcoin-related transactions is an obstacle for businesses seeking to expand its use. Without access to traditional banks and the ability to freely exchange Bitcoin for other currencies, the virtual currency risks remaining a novelty for niche users. The issue is expected to be a prime topic of discussion at a conference for Bitcoin enthusiasts next week in Las Vegas.

Richard Riese, senior vice president of the American Bankers Association, said the ability to bank Bitcoin transactions “is not high on our members’ list” of priorities. By contrast, at a recent ABA conference, bankers were less concerned about providing bank accounts for marijuana sellers in the states of Colorado and Washington, which have legalized recreational use while it remains a federal crime.

Because of regulatory pressure in the U.S., much of the exchange business has moved to Britain, Japan and China, Jered Kenna, founder of Tradehill, the Bitcoin exchange that lost its bank, said in an interview. LightSpeed Venture Partners, based in Menlo Park, California, announced on Nov. 18 that it would invest $5 million in BTC China, now the world’s largest Bitcoin exchange by volume.
Chinese Hosts

“The biggest indicator that the U.S. is losing this battle is that the first major VC to make an investment was in China,” Kenna said.

Bitcoin-related businesses say that when they do find banks willing to work with them, they often require them to keep the banking relationship quiet. Fred Ehrsam, co-founder of Coinbase, a San Francisco company that facilitates transactions for Bitcoin users by hosting digital wallets to store the currency, said the banks his firm uses don’t want to be inundated with requests.

“Our bank has asked us not to tell -- not because they’re ashamed but because so many Bitcoin businesses are looking for bank accounts,” Ehrsam said.

Mary Dent, a former bank general counsel in Silicon Valley, said bankers are reacting to Bitcoin the way most people do to any new payment form.
‘Crazy’ Currency

“If you heard about somebody getting mugged for the first time, you’d think cash is crazy,” said Dent, founder of Palo Alto, California-based consultancy dcIQ. “If you heard about credit card fraud for the first time, you’d think cards are crazy. Bitcoin is suffering from that.”

Richele Messick, a spokeswoman for Wells Fargo, declined to comment, as did Tyler Daluz of Citigroup Inc.

This idea -- that Bitcoin is more of a threat than an opportunity -- has dominated bank thinking about Bitcoin for most of its existence, Dent said. The federal bust of the Silk Road Hidden Website, an online drug and weapon marketplace where users paid in Bitcoin, highlighted the potential for illicit business, while thieves have also purloined Bitcoins online.

Benjamin Lawsky, the superintendent of New York’s Department of Financial Services subpoenaed 22 Bitcoin-related companies this year. In an Oct. 1 interview, he said the “major advantage” Bitcoin provides is anonymity, a cloak for illegality.
Money Laundering

Marco Santori, a lawyer with Nesenoff & Miltenberg LLP in New York, said the bank position is reasonable since U.S. law has “deputized” them to scrutinize every transaction for possible money laundering.

“Banks will want to provide services to administrators or exchanges that show not only great innovation, but also great integrity and transparency,” said Jennifer Shasky Calvery, director of the Treasury Department’s Financial Crimes Enforcement Network.

As a result, Bitcoin companies have ramped up their Washington lobbying, hiring lawyers and former regulators to make their case to government agencies and demonstrate to potential banking partners that they take regulators seriously.

Ehrsam, a former Goldman Sachs Group Inc trader, hired a chief compliance officer, Martine Niejadlik, who previously worked at EBay Inc and Amazon.com Inc. “She’s seen this movie before,” Ehrsam said.
Hiring Experts

Circle Internet Financial Inc. won the biggest venture capital investment yet, $9 million, for a Bitcoin startup, from Accel Partners and General Catalyst Partners. One of its first moves was to hire John Beccia, former chief regulatory counsel for the Financial Services Roundtable, a lobbying group that represents major financial institutions including JPMorgan Chase & Co. and Bank of America Corp. and the dominant payment networks, Visa Inc. and MasterCard International Inc.

Circle also put Raj Date, former deputy director of the Consumer Financial Protection Bureau and a veteran of Capital One Financial Corp., on its board.

All the same, the established financial services industry expresses skepticism of prospects for business ventures with Bitcoin entrepreneurs.

“For now I would opine that we are not yet there with digital currencies,” Paul Smocer, who oversees technology policy for the Washington-based Roundtable, said at a Nov. 19 congressional hearing. “They do provide opportunities -- more accurately, perhaps, suggest areas of opportunity -- but we will need to address the threats to consumers and society.”

Kenna, the head of Bitcoin exchange Tradehill, emphasized that “for the foreseeable future” the industry would need banks and need to respond to their concerns. “And the foreseeable future could be 50 years.”

To contact the editor responsible for this story: Maura Reynolds at [email protected]



Bitcoins is just a giant Ponzi scheme that will make Madoff look like a beginner when everyone counts their losses.
To work as money or currency, it has to have a stable value from 1 day to the next day. It can not change in value 25% up or down overnight. You have no idea what your money will be worth the next day that will not work for a currency.
The sad part is there are a lot of business people who have no idea of what it takes to create and maintain a currency that does not go up or down in value 25% a day.

Bitcoin is modern day musical chairs. Advice is to cashout asap if you were crazy enough to buy into this rubbish.

You mean like SS and medicare? Don't take my word for it....

Greenspan: "Because unless we come to grips with the fundamental issue, which is the fact that we have promised in the ways of benefits for Medicare and social security, physically more than we have the assets to deliver with. The economy can only grow so far. Right now, the claims on the real economy – forget finance –are getting larger and larger. Social security, I might add, is money. You can always print money."

Bitcoins are a threat to the democracy. They are not a threat to the Republic. Who can say this is a bad thing?

Uhhhh, we don't have a democracy or a republic.

It's a bad thing for anyone holding bitcoins. Bitcoin is pure speculation. Anything that can be copied on mass has no intrinsic value, not to mention that major governments shun the "currency". If you feel like taking a chance get in and out, but it's a crapshoot.

Copied "en masse" like dollars and yen and yuan and euro's? Seems to me everyone should be quite comfortable with BTC.

Yeah, imagine that: Banks are afraid of a currency they can't control visa vie the Fed/ Reps they buy in Washington, DC. Oh no! it's peer to peer and the e-currency can be transmitted FREELY and for FREE between people for commerce and we can't figure out how to profit off that as middle men with transaction fees. Whadawe gunna do?!

I like the government red-herring argument about illicit activities. If it were the case that the government wanted to prevent illegal activities though the currency, cash would have been banned a LONG time ago.. wonder how many in TRILLIONS world wide in drugs, murder, weapons have been financed via Cash. Using that potential abuse as an argument against a new currency? What a joke.

It's a big Ponzi scheme. Don't be a sucker and turn off your brain because they throw some rhetoric at you. That's how a confidence scam works.

How's this for a Ponzi? Right from the words of the Maestro himself:

"Because unless we come to grips with the fundamental issue, which is the fact that we have promised in the ways of benefits for Medicare and social security, physically more than we have the assets to deliver with. The economy can only grow so far. Right now, the claims on the real economy – forget finance –are getting larger and larger. Social security, I might add, is money. You can always print money."

Read it and weep "suckers". The ponzi is your government money. Greenspan is telling us that SS and Medicare will be revamped. Just like that. Why? Ponzi. Keep living your delusions.

Just for your edification, Greenspan is no longer the Chairperson of the Federal Reserve. He retired almost 8 years ago.

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