Community

If regulators are regulating it, it is because it's impact is very real. That impact is felt either at the consumer or market level, or both.

It is important to note that at no time have any of the regulators suggested that Bitcoin should be made illegal or be stopped. The move to regulate is to protect the market, not the incumbents (or cash). 

@Ketharaman

I know we could have this debate all day and I'm not going to change your mind, and you're not going to change my mind. However, for the record:

80% of cash transactions in the UK are under £10 (http://news.bbc.co.uk/2/hi/business/8618541.stm)

The decline of cheques is dramatic in the UK (and all the developed world)
(http://www.financialadvice.co.uk/news/12/ukeconomy/7831/decline-of-cheques-tracked-by-campccc.html) 

This change in behavior is because cash and cheques are not the most efficient mechanism in most cases, with the exception of at retail stores for micropayments currently. This decline is very real and measurable and there is no indications that it will stop.

I believe it is better to be prepared for a future where digital payments and currency are the norm, than to hope that this shift will stop and behavior will revert to 19th century norms.

Remember, the objective of digital payments and virtual currencies are not primarily to challenge traditional mechanisms, in the end these changes are being driven by consumers who see these as better ways to live their life in the payments ecosystem. If you believe consumers are mistaken in their acceptance of these changes, you had better start educating them fast, because right now Apple, PayPal, BitCoin, Moven, Visa/Mastercard, and a bunch or others are working to enable customers on this layer. There's almost no one saying that cash and cheques are a better way...

Finextra's next move is Cat videos I'm guessing...

@Liz

Of course, you are correct that a bank is a bank, and even if 90% of the staff are IT related (10% compliance I'm guessing) then you're still a bank!

Yes, but the lines blurr when most of these big banks have bigger IT teams than the likes of Oracle, Microsoft, etc. If it quacks like a duck... it's not a cat.

The reality is that banks will actually be far more efficient ultimately if the operational side of the business is run as an IT company, with the banking component as the business overlay to that structure. The more banks insist on a bank organization structure that biases AGAINST technology, the more a bank will be divided against itself.

A bank is a bank, but it must behave like an IT company to be efficient, while maintaining the compliance requirements of the regulatory environment. I probably don't need to point out that the only way banks can continue to be compliant these days is through tech. 

Ketharaman,

95% of money movement on the planet today is already virtual/electronic. Central banks do not need to disown the currency to disown cash - clearly.

The issue for Bitcoin and this behavioral shift is not the death of 'currency', but the death of physical cash - for all the reasons previously mentioned. The death of greenbacks doesn't mean the death of the US Dollar...

Some could argue that in the last 50 years money movement has gone from zero percent electronic to 95% electronic - hence, the demise of physical cash might be considered a very real issue. The problem and benefit of the vast amount of electronic movement of funds is traceability. While concerns over Bitcoin's ability to be utilized for criminal activities has been apparent, those same concerns have existed for hard currency for much, much longer:

See - http://rt.com/business/banknotes-euro-criminals-bank-628/

UK elimination of the 500 Euro note is further evidence of the intent of governments in this respect (See DailyMail)

AML and Traceability is clearly going to be a core driver for banks and governments for the forseable future, this will create friction for the public who may not want this level of inspection or the loss of anonymity, but I'm not sure that will make much of a difference in the end.

BK 

Jonathan,

The problem with cryptographically generated PINs is memory load. We've got test after test of users who if they can't easily remember their PIN will write it down or store it in their phone.

With the memory load factor being a central hurdle to this problem the only solution is a simpler secure form, not more complex ones. Hence why biometrics are so core to a permanent solution to the Username/PWD/PIN connundrum. 

Brett King
BANK 3.0 

Matthew,

I worked extensively on two-factor authentication models for large banks like HSBC and others, and what we found was that the more you try and make a system secure, the less secure it becomes because due to memory load consumers find work arounds that are increasingly unsafe. 

To illustrate - you put two PINS on a card instead of one, and people will try to use the same PIN, or write down the second PIN on their card because of the memory load.

The solution is not more complex passwords or enforcing stricter rules, but as you've pointed out more sophisticated authentication methods that don't require memory load (i.e. Biometrics).

Brett King, BANK 3.0 

Anon,

There is an unwritten intent in FATF rules, Patriot Act and other such frameworks to eliminate AML/Terrorist Financing that cash is good for crime/evil and therefore should be eliminated or reduced wherever possible. Since the 90s governments have been intent on getting as much traceability as possible into cross-border transactions for this reason. 

There's a lot of work that has been done on this, such as:

http://repub.eur.nl/res/pub/37747/G-%20Chapter%204-%20The%20Development%20of%20AMLR-%20Criminalization.pdf 

This is in itself an argument for both increasing digitization of cash and for consumers to attempt to gain more anonymity by using cash more. I just think that the imperative to track money movement will trump the consumer imperative to seek anonymity in the end. The other influencer is that our view of privacy is changing because of social and other factors, so while it is a hot topic right now, we'll adapt over the coming years to greater scrutiny in the system and governments, etc will try to position circumvention of that scrutiny as somewhat anti-social, etc. 

The outcome is the same - more traceability, less friction, but less privacy and more efficiency. It tends to lend credibility to a virtual currency model over time.

BK 

This is a fair question. I was recently reminded by a VP at Oracle that BofA's annual IT spend exceeded the combined R&D budgets of Microsoft and Oracle. An argument could be made that this alone qualifies most banks as IT first, bank second. The problem is that most banks allocate a massive budget to just maintaining legacy infrastructure and staying compliant, without even getting into core system replacement, etc.

Even if you believe the assertion that banks being characterized as IT companies is absurd, the fact is that IT is much more fundamental to a banks operation than say an Airline or retailer. 

IT is now and for the foreseeable future a simple reality of the business and no bank is able to operate without IT being a fundamental component of the business. Does that make them IT companies? If you ignore the fact that banks have banking licenses and do banking the conclusion would undoubtedly be yes.Regardless. if banks don't start operating more and more like IT companies in the future I think it will hurt them operationally.

Brett King, Bank 3.0

There have always been an abundance of people willing to question the need for change when major, embedded behaviors are threatened with disruption or replacement.

A great illustration of this is an article written by a Wall Street Columnist (Michael Silverstein) in April of 2009 entitled "Will Cars Ever Replace The Family Horse?" - basically looking at the clean energy problem, but from an illustrative perspective arguing that cars will never likely replace the strong, predictable transport economy of the late 19th Century, i.e. the horse:

"Let’s be honest here, these late nineteenth century heavy thinkers would conclude. Automobiles were a rich man’s toy. They would never be manufactured at a cost that would make them practical to the ordinary person. All the numbers and simple common sense made clear that an auto-based culture was a pipe dream. A nice pipe dream, perhaps, but one that must not guide national economic policy..."

Just because a system has worked well in the past, is never a protection from a better system that works more efficiently, faster, cheaper, etc in the future. Disruption in the print, media, music, retail industries right now are significant, but were once considered fancifal by commentators like Clifford Stohl from newsweek:

"Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms…Commerce and business will shift from offices and malls to networks and modems… Baloney. Do our computer pundits lack all common sense? The truth is no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works…" - Newsweek, Feb 27th 1995 

This is the point we are at with cash. Is there absolute proof that technology and consumer behavior will erode the use of physical cash? Yes, if you are prepared to look for it. However, if you don't want to see it, you'll just as likely to find a compelling argument why the automobile will never replace the family horse, the telegraph will survive the onslaught of the telephone and why books will always be sold through a bookstore. 

I don't really have to convince doubters of the fact that cash use will decline because all I have to do is wait and the evidence will become apparent in just a few years. The question to ask in all this is why defend cash at all? That answer is instructive, because there are only two reasons why you would defend cash:

1. It's a perfect system and can't be replaced (unlikely), or
2. The fear of change of this system is a threat for some reason

Cash is not a perfect system or we wouldn't have mobile money, paypal, bitcoin and electronic transfers at all. Thus, we're already been working to replace cash systemically and have been for over three decades now. Today 90% of transactions around the world are done electronically - therefore, the battle for the dominance of cash has already been lost. It will just take a little more time for you to see it in your wallet - but it is inevitable.

I'm afraid that the tales of the death of cash are only going to get more believable, and it won't take anywhere near the 190 years that has been postulated above. 

Ketharaman,

Are you telling me colonists on Mars and on the Moon in 2200 are going to be using USD currency??? Seriously, whatever are you smoking? 

I guess they'll still be watching cable TV, reading hardcover books and watching VCRs too yes?

Your proposition is that the entire world in every other arena is exploding digitally and technologically (transport, media, energy, publishing, manufacturing, etc), but that money will buck that trend continuously for the next 200 years because its... paper? Dude, get a grip. Change is what happens. Embrace it!

BK