Bitcoin is an interesting experiment that is no threat to the banking system. That’s the conclusion reached by analysts at Citi Research in the latest of their series of reports on the technology behind the digital currency and its potential.
Bitcoin is essentially a successful proof-of-concept of a digital currency, states the report, written (like the others) by Keith Horowitz with contributions from Adrien Porter, Frieda Liao, and Michael Cronin. It’s not exactly meant as a compliment, because that is all the group is willing to credit to the cryptocurrency. Comparing a decentralized network like bitcoin to centralized networks like, well, like the entire existing global financial infrastructure, the Citi team concludes that the centralized networks work as well as, if not better than, bitcoin.
“Having written three reports on the topic of blockchain,” the group writes, “one common theme we have observed is the limited use-cases for the peer-to-peer transfer of value due to a number of issues including scalability, network adoption and lack of a legal/regulatory framework for dispute resolution.”
On those levels, they don’t see a substantial improvement in bitcoin over existing systems. Right here is where the bitcoin true believers will scoff, of course, and the finer details of those points could be argued all day. However, there is one conclusion they draw that did catch our eye: “Domestic payment systems today are centralized,” they write, “and provide the customer a relatively good experience.”
A “relatively good experience” has been a problem for bitcoin for several years now. The vast majority of consumers, certainly in the developed world, simply don’t care about the benefits of decentralization and anonymity. What they would value is a clean, easy-to-use product, and nobody in the bitcoin industry has yet to build the proverbial “killer app” that meets that goal (with one or two possible exceptions, see below). Bitcoin has excited cryptoanarchists, tecchies, entrepreneuers, and Wall Street – and in the wake of the Brexit selloff has been touted as the new gold, essentially – but it has had limited luck in cracking the consumer market.
This isn’t to say there are no uses for bitcoin, or that there’s no future for the digital currency itself, or the technology underlying it. Citi is clearly interested in it. The bank is part of an international consortium of banks led by startup R3 that is building blockchain-based banking systems. At its internal innovation lab, the bank built three and tested “Citicoins,” internally constructed digital currencies.
Also, Horowitz’s team has written two other papers already on the topic: In a March paper the researchers concluded that blockchain technology has potential, but is years away from widespread adoption. In their first paper back in January, the team said blockchain has the potential to turn banks into “dumb pipes” that mutely move money, but that banks have several defensible moats to counteract that.
The Citi team does see potential for bitcoin, and goes so far as to point to three startups it finds compelling: Circle, BitPesa, and Abra. Circle is building a payments app that looks like a social network, Abra is building one that’s aiming at financial inclusion, and BitPesa – which started out focused on remittances – is now focused on building a business-to-business payments network. Citi acknowledges that the area of financial inclusion is probably where the best opportunity lies for bitcoin and its ilk, “markets with limited access to traditional financial services due to cost and reach.”
Where else does bitcoin and its model represent a significant threat to the banks? “We do view a central-bank issued digital currency as a significant threat to the banks’ central role in payments,” they write. “But this seems to be a very long tail risk.”