Whether these warnings are aimed purely at pointing out to the general public that bitcoins are at risk of theft if unsecured (the same as cash) or are an attempt at keeping a lid on bitcoin is unclear. In either case though it seems that the banks of the world are finally waking up to bitcoin as a serious development rather than just a flash in the pan.
As I have said before the ease of creating new variants of bitcoins (alt-coins) leaves the barrier very low for large companies that either already have infrastructure to leverage or can put it in place quickly to potentially walk in and try to compete with bitcoin with their own alt-coin and Chase may be doing just that.
In filing their patent they may be taking one of a number of approaches:
- Leveraging bitcoin with their existing banking business and account holders
- Securing a patent to prevent others from developing businesses that leverage bitcoin to provide more traditional-style but flexible accounts
- Creating their own alt-coin (ChaseCoin)
- Creating a wider-spread alt-coin backed by a large section of the financial system (TBTFCoin)
Existing banks, if they recognised the trajectory of bitcoin and crypto currencies, might see that it would be important in the future for customers to have very easy ways to transfer funds between their bank accounts and dominant virtual currencies. Certainly if banks were able to offer this function many would prefer it to the currently quite cumbersome process of transferring money to then buying and selling bitcoins via exchanges (though this will no doubt improve).
In addition in the future if there remains significant friction between bank accounts and bitcoin we may find people basing themselves financially more and more in crypto currencies and converting back to their national currency as and when required rather than the other way around. Removing this friction with close integration would allow both to coexist more easily and may prevent this potential exodus.
If one bank had a patent on this close integration then they would potentially have a stranglehold on other banks, forcing them to either watch customers leave or switch, or pay up for the use of the patented method.
For those disillusioned with the existing banking industry maintaining a bitcoin based account, either with their own personal cold storage or with paid-for insurance, but which has the ability to integrate with the existing system to pay bills via direct debits and card payments might be a tempting alternative to traditional banking.
If Chase foresaw such a development they would likely be keen to prevent it and a patent covering may do that at least in their own domain.
ChaseCoin / TBTFCoin
Bitcoin though is not merely the product of its code. As we have seen already many alt-coins have tried and failed to beat bitcoin at its own game. These alt-coins may have had some perceived improvements and benefits over bitcoin however they were not significant enough to sway general opinion and pull users away from bitcoin into their own currency. Bitcoin has as a result gained more momentum and further cemented its place at the top with its current value a reflection of this. As it has gained more traction it enters into a cyclical loop of gaining value, thereby becoming more attractive for miners and investment, thereby gaining more demand, thereby gaining value.
To stop this loop would require a very significant pull to a very credible competing alternative.
Whether Chase can pull this off will depend on what pulls they can create for their new currency. Many of the benefits of bitcoin simply cannot be recreated at will by Chase.
Competition pt 1 - Network Security
If Chase chose to secure their network in the same way as bitcoin then they are essentially securing it by making an investment larger than any attacker. Regardless of the algorithm they choose if they can purchase N hashes for $1bn then a malicious organisation could always choose to purchase N+1 hashes for more than $1bn (often less given that hardware will yield only improvements over time).
National or international cooperation within the financial industry could push this figure up and raise the barriers to attack and Chase's patent may allow them to set this up while retaining a controlling hand (and profit) from its operation.
Competition Pt 2 - Decentralisation
If Chase seceded control over their cryptocurrency then they are essentially in the same position as any other alt-coin today. This doesn't mean they are bound to fail however it does mean they would need to quickly build infrastructure as fast as the bitcoin community is developing it. Given the large and accelerating investments that are being made into bitcoin companies this would be difficult and Chase's coin would likely go the way of many other alt-coins.
Retaining control would lead to a closed system of payments that merely happened to be implemented using a bitcoin-like protocol. From an end user perspective it is hard to see this as true competition to bitcoin except on a most basic level of being able to transfer value or process payments. In such a case likely Chase would peg its value to the dollar meaning that any balances were held in a manipulable currency. The benefits of deflation would be no more nor would any benefits of decentralisation and protection from bail-in or other confiscation. In a world of bail-ins, if Chase goes down, your funds go down with it.
Still though Chase may not value these benefits and they may also believe that their end customers do not value them. In such a case if Chase can introduce and patent a system whereby any dollar denominated bank account can easily accept payments in dollars from other accounts without any significant infrastructure, vetting or fees this would still be a leg up over the existing payments set up used by most of the world.
Competition Pt 3 - Widespread Acceptance
Clearly large portions of the world will not be opening an account with a US bank merely to make payments to merchants associated with it. Such a scenario is a step back even from the current payment systems. Chase then having to choose between retaining control over they currency or not is implicitly choosing its scope at the same time. If they retain control then its scope is limited to where Chase likely already has customers whereas if they set it free it has to compete against bitcoin purely on its own strengths along with whatever infrastructure Chase can throw up in short order.
A ChaseCoin or TBTFCoin may either way find itself limited in scope more than likely leaving bitcoin as the dominant world-wide cryptocurrency.
All Coins Holding Hands Together?
Cryptocurrencies created within national financial industries and pegged to the national currency offer a slightly more compelling case since existing accounts, cards and payment systems could at once be leveraged to support the new system and pegging to the national currency would avoid conversions and capital gains taxes.
- This would still remain purely a payment-system play (not store of value)
- It would retain many of the risks of the existing systems in terms of confiscation and inflation
- Since it does not operate outside banks it would retain the controls and restrictions of existing payment networks
- It would require very widespread and fast cooperation and investment by banks around the world to quickly pose as a contender to bitcoin while it is still in its early stages.
- It would remain limited in its scope whereas a decentralised currency such as bitcoin has no such borders and is open to anyone on the internet
- It would arguably have an image problem with many around the world since banks currently garner no love, particularly in comparison with a currency which is not affiliated with any currency or any bank. This would only be exacerbated by any further financial crises.
What may be more likely is either a hodge podge of far smaller scale corporate and industry cryptocurrency use with bitcoin acting as the default for transfers between them and as a default for international transfers and payments, or simply with these closed alt-coin systems withering on the vine in the same way that systems such as Barclays Pingit cannot remain relevant.