Banking on Bitcoin

On May 25th, the value of a bitcoin rose to an all time high of $2,791.70. By the end of the day, the digital currency had fallen by more than $300 dollars, highlighting its volatility. However, to put this into perspective, bitcoin was launched less than ten years ago, and initially it was valued at $0.0025. In other words, if you had purchased $5 worth of bitcoin in 2009, your investment would be worth nearly $5 million dollars today! Ethereum, a competitor to Bitcoin, is up more than 2,000% this year alone. So now that I have your full attention, welcome to the wonderful world of digital currency.

So what is digital currency and why is everyone so excited? According to Technopedia, “digital currency is a payment method which exists only in electronic form and is not tangible.” If you think about it, we use digital payment methods such as credit cards, electronic fund transfers, or mobile payments all the time. The difference between these more established forms of payment and bitcoin is that the more traditional payments methods all involve a bank or a financial clearinghouse of some kind. In other words, for a fee, some central authority is responsible for processing and posting the payment. Today’s digital currencies do not use a central bank, but rather depend on a “distributed ledger.” Instead of a bank or credit card company holding the transaction data, every bitcoin owner has all of the information for every other owner on their computer. This distributed ledger system, known as blockchain, is really the core innovation of digital currencies and what has allowed them to prosper. At this writing, in addition to bitcoin and ethereum, there are at least 20 other digital currencies.

Because digital currencies cut out the middleman from financial transactions, this obviously poses a risk to the billions of dollars in fees currently charged by banks and credit card companies. So what are they doing about it? Perhaps not surprisingly, many banks are planning to get in on the action and issue digital currencies of their own! UBS, Duetsche Bank, Santandar and BNY Mellon have announced plans to launch their own version of digital currency, called utility settlement coin, in early 2018. Other large banks including The Peoples Bank of China, The European Central Bank, The Central Bank of Singapore, and many more also plan to launch digital currencies in the near future.

Throughout history currency has evolved from bartered commodities, to coins, to paper money, and finally to credit cards and electronic payment systems. Now, whether we’re ready for it or not, it seems that our money is poised to evolve again.

Doug Young Ph.D.

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