The past week has seen Chase bank in the USA file a patent application referencing a payment system very much reminiscent of bitcoin. At the same time we have had a round of warnings from central banks around the world (NZ/Australia, Europe, Switzerland) with more to come no doubt.
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:
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)
Leveraging Bitcoin
At a very simple level Chase has customers that hold accounts with them and conduct transactions. If we view the patent attempt as innocently as possible Chase may be simply trying to gain an advantage over other banks in patenting the concept of integrating a brick and mortar bank account with virtual currencies used for transfer.
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.
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.
Blocking Development
Rather than seeing cryptocurrencies as the future and jumping on the bandwagon to create their own Chase may be more concerned with moves in the opposite direction: preventing bitcoin based companies from setting themselves up as 'Cryptobanks' able to offer people their own bitcoin based accounts and services but also branch out into more traditional forms of banking.
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.
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
The most common interpretation of the patent has been that Chase plans to introduce their own cryptocurrency. Statements reported from the Russian bank Sberbank CEO also suggest that Sberbank is considering issuing its own cryptocurrency which would lend further weight to the idea that Chase may be considering the same.
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.
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
Bitcoin's mining network keeps it secure and this is a real threat as we have seen with attacks on smaller currencies such as Worldcoin. In order to replicate the security of bitcoin Chase would likely have to replicate the hashing power of it which would mean investing large sums of money into ASICs. Alternatively their network would have to be closed - accepting only predetermined nodes as trustworthy and leaving them open to more traditional forms of attack and manipulation.
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.
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 plan to introduce an alt-coin then either they will retain or secede control over it. Retaining control would mean retaining complete control over the mining network whereas seceding it would mean effectively inventing an alt-coin much like any other available today.
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.
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
Whether such a system would be preferred over bitcoin would depend on a number of factors. Given ease of use and enough of a push it is possible that merchants would gravitate to it as a simple method of accepting dollar-denominated payments however we are left wondering where the payments will come from?
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.
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?
Even a financial-industry-wide alt-coin would be limited in scope although that scope may cover a large area of the developed world today. Individual banks creating their own currencies and payment systems, managed by them are really no different to existing solutions such as PayPal or even Amazon Coins.
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.
However:
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.
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.
However:
- 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.
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