For centuries banks have provided a medium for the facilitation of financial transactions domestically and internationally. During this time they have provided a necessary service that has helped facilitate the growth of domestic and global commerce.
However in the last century especially, it could be argued that the financial services sector has become growingly complacent with archaic infrastructure, considerable fees and a severe deterioration in integrity and trust.
The lack of serious competition may have fostered this complacency, however, this all changed with the creation of Bitcoin in 2009. There is no doubt that globally banks are very worried about the competition that Bitcoin offers and for good reason. Bitcoin has the potential to massively disrupt their privileged position as financial/transaction intermediaries that net them billions in commissions and fees every year.
However, if bitcoin is to grow into a mass adopted currency, it needs to provide retail users with utility and benefits that go above and beyond the current banking system that currently handles the vast majority of transactions.
With a recent study showing that UK consumers are still very sceptical about Bitcoin, now may be a good time to look at this in more detail.
This article aims to take a closer look at how Bitcoin compares in cost, speed and availability against other transaction methods used in retail banking in the UK. But before we look at the intricacies, there are two major benefits that Bitcoin can potentially offers over the current banking system, that I think need special attention:
Reduced Counterparty risk:
It is no secret that due to fractional reserve banking (FRB), banks have rehypothecated thier tier 1 capital multiple times in the UK, much of which has made its way into risk assets. This brings into question if banks actually have the collateral available to back all the bank deposits currently sitting on their balance sheets. In the event of one or more major sovereign defaults and the likely ensuing contagion, it is not difficult to envisage a scenario where the mark to market losses on these risk assets would render one if not more of these institutions insolvent.
In an event like this, bitcoin potentially offers a safe haven (similar to physical precious metals) of having an investment without any counterparty risk to the highly leveraged current financial system. Whilst counterparty risk can come from holding bitcoins in third party companies such as exchanges like Mt.Gox. This risk can be mitigated with various hot and cold storage techniques that can greatly reduce or almost eliminate this risk altogether.
Protection from devaluation of fiat currency:
Around the world, the continuing and accelerating debasement of fiat currencies through FRB and Quantitative Easing (monetisation of sovereign bonds) has accelerated, especially since the financial crisis of 2008 and the bank bailouts that ensued. In the UK currently £375 billion has been pumped into the monetary system by the BOE and the real world effects of this can be seen with asset price inflation creating price rises in fuel, energy, utilities, travel, tuition, house price and rents. The result of this, simply by holding your money in GBP, people’s purchasing power continues to decrease as low interest rates cannot offset losses from a higher rate of inflation.
On the other hand, as a currency, bitcoin has a set limit of 21 million units. Whilst bitcoin remains inflationary as bitcoins are rewarded through the mining process, the inflation rate is very slow and as a result, devalued fiat currencies continue to fall in value against bitcoin. One of the major advantages of this is that bitcoin holders possibly have the opportunity to protect their purchasing power from more aggressive devaluation.
Having looked at two of the major benefits that Bitcoin could provide going forward, let’s take a closer look at this comparison.
The following information takes a look at how Bitcoin compares against a standard infrastructure and fee structure of a large UK retail bank account. It will look at the most widely used transactional methods used BACS, BACS faster payments, CHAPS and SWIFT, in terms of cost, speed, availability and limitations for Domestic and international payments. A list of all financial institutions that use these methods can be viewed here.
The information collected is publicly available information from one major high street bank in the UK. Whilst other banks may differ slightly in there fees structure this information should provide a fairly reliable benchmark across the main players in the industry.
Before we review this information, it is worth taking into account that the Bitcoin protocol and bitcoin market factors are changing all the time, so the scope of this information is to give a realistic snap shot in time of what the Bitcoin can potentially offer. Depending on adoption and growth of the bitcoin network these factors are likely to change going forward.
At the moment, it is possible to make fee free domestic transactions in the UK through BACS and BACS faster payments with a retail bank deposit account up to the value of around £25,000. A full break down of faster payment limits can be viewed here.
For clients sending money between the institutions where faster payments are available, this service actually provides a fairly good cost effective way of sending money domestically in the UK.
It is worth noting that Bitcoin transactions can be made without a fee, but the fastest transaction confirmation time of 10 minutes cannot be guaranteed. More detailed information on Bitcoin transaction fees can be found here.
Whilst this undercuts the current recommended miner fee of around 0.01 mBTC to help ensure a 10 min transaction using Bitcoin. It could be argued that it is the speed and availability that will make Bitcoin a viable competitor for smaller domestic payments. Further adoption of bitcoin and increased transaction volume could potentially reduce this fee in the future, which would help make micro and small transactions more cost effective in a domestic scenario.
One area where Bitcoin clearly offers an advantage is with large, time sensitive transactions that make up the bulk of CHAPS payments in the UK. Bitcoin can clearly undercut the speed, availability and average £30 fee charge for this service which is used mainly for payments that are normally above the BACS and BACS faster payment limitations.
Making International Transactions:
As the Bitcoin protocol and bitcoin currency can be used globally, the advantages of sending international payments are a lot more clear when compared to the most commonly used method of SWIFT, currently used by the banking system. The process of sending money internationally is the same process as sending domestically when using bitcoin in terms of cost, speed and availability. SWIFT on the other hand, as you can see from above, has a lot more disadvantage’s against Bitcoin in terms of:
- Cost (especially for smaller transactions),
- Availability (limited to working days),
- Transaction limits (£75,000 online)
- Speed perhaps most importantly the time for the transaction to clear. At best transactions clear in 2-4 days, but depending on the geographical region of the receiving financial intermediary this can sometimes be as much as 12 days.
In addition to this, a widely discussed major benefit of Bitcoin is that it provides a low entry transactional network that opens up commerce for billions of people who are currently unbanked around the world, for reasons that range from geopolitical, to the lack of banking infrastructure in there geographical region. With bitcoin something as simple as a cell phone can be used to transfer bitcoins internationally.
Receiving an International transaction:
Another cost that can be mitigated by Bitcoin altogether is when receiving international payments. Whilst the percentage cost is fairly low for large transactions. When receiving international payments through a retail bank account in the UK, it is the more common smaller payments that incur a noteworthy transaction fee on a cost % basis.
Other bank fees that could be avoided through the use of Bitcoin:
Time is Money:
Having looked at the difference in transaction speeds across Bitcoin, BACS, BACS – FP, and CHAPS, we can now look at the total time that could potentially be saved per annum, using Bitcoin, based on the amount of transactions for each method and the generally accepted transaction times.
Whilst there are many variables, including transactions that clear before the limits shown below for BACS,BACS FP and CHAPS, as well as Bitcoin transaction confirmations that exceed the 10min 1st confirmation time. The following information I believe shows the potential for time saving when using Bitcoin versus the current banking methods.
The total amount of transactions shown below is taken from the ‘Annual Summary of payment clearing statistics 2013: Inter-bank and Inter-branch Clearings’ available from the UK payments council.
Drawing a comparison in overall time saved when using Bitcoin over the current methods of banking transactions, we can see that the potential time saving when using Bitcoin is huge. It’s easy to conceive just how much time could potentially be saved in the UK alone with the reduced time in waiting for transactions to clear and how this can accelerate the speed in which domestic and global commerce can take place.
Whilst the Bitcoin protocol is currently capped at 7 transactions per second with artificial limits to prevent major growth of the Blockchain, before the network is ready for it. These limits can be removed and the amount of transactions that the network can handle is scalable by many multiples, especially with growing computer power which will help facilitate this. If the network continues to increase in size and speed, the potential for being able to facilitate the amount of transactions shown above is not inconceivable.
Whilst the UK banking industry still plays a dominating role in facilitating domestic and international transactions in the UK and in some instance, provide a good medium for very low cost transactions. The risks associated with using the banking system in the UK are growing by the day.
Coupled with long transaction times and in some case partial availability, Bitcoin looks set to provide much needed competition in the UK retail banking industry, especially with its low cost for domestic and international payments, fast transaction times and 24/7 availability. In addition, the prospective growing need to hold assets that can be used to hedge against counterparty risk and debasement of fiat currency, could see its adoption grow.
Whilst it is unlikely to replace the banking system in the near term. On a longer time scale, with further development of key services needed for wide adoption. The scalability of the Protocol and network provide a realistic proposition of Bitcoin having a much larger market share of this industry.
Because of this, it is likely we will see a determined effort from these banking institutions and other powerful payment providers to try and slow down and limit the impact of Bitcoin through lobbying, regulation and patent trolling.
After the recent Chinese crackdown in particular on Bitcoin exchanges in China, I discussed this fact with Javier Marti, Bitcoin expert, digital trend analyst and CEO of Bitcoin Global Investments.
During the conversation he stated;
“One of the most important things to look at right now, is who has the most influence over the law makers and what will be the outcome?”
“The difference may be a future in which Bitcoin comes to mass adoption in the medium term, or one where the process is greatly slowed”.
Whilst Javier remains optimistic about the potential of Bitcoin going forward. This is something that has to be taken into consideration.
Whether you agree with political donations or not, perhaps one of the silver linings for Bitcoin in relation to this, is the recent news that US Politicians can now accept bitcoin donations up to the value of $100, which could lead to similar legislation in other jurisdictions.
The future remains to be seen, but Bitcoin has the potential being one of the greatest examples of lean engineering the financial services industry has ever seen, and the fact that Bitcoin is being backed by a tireless community network of developers, entrepreneurs, investors, business minds, journalists and enthusiasts, may help it face up to these head winds.
In addition, with the possibility of extreme tail risk in the banking industry, it is possible the adoption of Bitcoin in the future may go from being a ‘want’ to a ‘need’.