By John Enoch, UK
Part four of a six-part blog series exploring the history, potential and implications of virtual currencies as they become more widely accepted.
I suspect most people would say they do not much care what the implications are for financial institutions if Bitcoin seizes a sizable share of the financial payments market. One of the motivating factors behind virtual currency development is a desire to loosen the stranglehold of big banks on a country's commercial activity. It is, though, worth being aware of what will probably happen.
On the one hand, the banks will fight tooth and nail to have an equivalent level of regulation put on to virtual currency providers and facilitators (the European Banking Authority Opinion referred to previously is an example of this). Dressed up as concern for the poor consumer, the aim will be to reduce the cost and simplicity inherent in a distributed currency model such as Bitcoin.
On the other hand, banks (and other financial institutions) will not sit back and allow their market share to be eaten away without a fight.
Online food or clothing retail provides a good example. Some major chains were faster than others to introduce online deliveries, 'click and go', and other variants of online shopping when they saw that online retail was not a force that could be turned back, while others were slower. Today, all major retailers worth their salt have a strategy that encompasses both bricks and mortar, and online sales. In principle, it will not be different with banks (who already have their online banking arms). If they cannot beat virtual currency, they will want to join the party in some role or other.
It may also be that the threat from virtual currency will inspire technical innovation on the part of the banks, leading to improved customer experiences, whether they are using virtual or conventional currency. This would particularly be the case if free competition between the two is allowed, as certain think-tanks are suggesting.
In any case, banks will need to adapt and update their internal risk handling procedures to deal with the new challenges posed by virtual currency transactions.
At the risk of losing any reader still with me on this section, I would add that there are really interesting implications for accountants also. Fayez Choudhury, CEO of the International Federation of Accountants (IFEC), recently said that the development of Bitcoin could actually reduce fraud, rather than, as is sometimes presented, increase it. In his view
'the public ledger, block chain and other encryption proprieties can evolve into transparent systemic safeguards'.
He also said:
'As the Bitcoin system relies more on cryptographic proof than on human trust, its transparent processes may eventually require different audit procedures.'
If there is an overwhelming demand for further discussion on the future of auditing in the light of virtual currency (don't all shout at once), I will comment further, because changes could be very far-reaching. But I suspect I have gone as far as anyone wants me to go with this.
The approach of the insurance sector to Bitcoin is, on the whole, cautious, but it has proved possible to insure 'Elliptic', a digital storage vault, through Lloyds in London, and various other digital service providers claim to be fully insured. The insurance market as a whole is adopting a 'wait and see' approach. Many feel that digital currencies have to develop sufficient security and stability before it can become a standard insurable risk.
Next week I will look at how the regulations of Bitcoin are shaping up.