Maybe someday you’ll be able to go up to your bank teller and withdraw or deposit your money in bitcoins. But today, Bitcoin banking is still far away.
The reasons have to do with risk and regulations—two topics that don’t have much to do with your day-to-day finances, but that mean a lot to the banks that handle them.
Enthusiasts of Bitcoin, an all-digital currency, laud it for its cryptographic security and pseudonymous transfers which make it like cash. But in the end, it’s another currency, like euros or pounds. If you want to do business in dollars, you’ll have to convert it to dollars. And where do you get your dollars in cash today? Probably a bank.
While early adopters may be content to roll their own encryption and figure out how to store bitcoins securely, most consumers will probably want to leave the safekeeping to someone they trust with other forms of money.
Bitcoin And Banks
It’s not that banks have a bad relationship with Bitcoin. It’s that most banks don’t have much of a relationship with Bitcoin at all.
Eli Dorado, director of the Technology Policy Project at George Mason University’s Mercatus Center, said that even though tech-savvy people have known about Bitcoin for years now, banks still view the currency as an unknown—and hence a liability.
Before consumers can withdraw or deposit bitcoins with a bank teller, banks will have to get used to dealing with Bitcoin-related businesses. And they’re largely not there yet.
“The real problem in Bitcoin is businesses getting banking at all,” Dorado said. “Banks are afraid that Bitcoin businesses will fall into the category of being a high-risk activity, the way firearm sales and porn stars’ bank accounts are sometimes viewed.”
In the Bitcoin space, three clear types of business are emerging.
There are Bitcoin exchanges, which work like foreign-currency trading desks, letting people swap bitcoins for dollars, yen, euros, and other currencies. Mt. Gox was once the largest—and its failure did little to build confidence in the business.
Then there are Bitcoin wallets, which hold bitcoins for consumers and businesses, and let them transfer or spend their bitcoins.
Then there are Bitcoin payment processors, which help merchants accept bitcoins in exchange for goods or services, much like credit-card processors do. Some convert bitcoins to dollars or other local currencies immediately, while others let merchants keep the bitcoins if they choose.
Some Bitcoin businesses combine multiple functions: For example, Coinbase provides both a wallet for consumers and payment processing for retailers.
These are all lines of businesses that banks already pursue in local currencies—so it would be logical for them to enter the Bitcoin arena, too. So far, they haven’t.
Bitpay is one of the larger payment processors. Its customers include retailers like NewEgg and Shopify.
“We’re much like any merchant processor in the credit-card space,” said Bitpay CFO Bryan Krohn. “We take payments, convert them to local currency, and put them in the merchant’s bank account.”
Bitpay’s Krohn says the company spends a lot of time and money to talk to state and federal policymakers so they know what Bitpay is, what it does, and how it complies with all known Bitcoin regulations.
“With any new technology, there are going to always be frowned-upon uses,” Krohn said. “When the Internet first came out, it was used for a lot of unsavory stuff. Some banks won’t even risk working with Bitcoin businesses, not because they lack the technical ability, but because they have concerns about how it’s used and how it’s regulated.”
Bitpay is working with a bank to send deposits to customers’ bank accounts. But Krohn wouldn’t name it, citing the “importance of that relationship.”
That’s indicative of the caution banks are taking with respect to Bitcoin.
Making Friends With Bitcoin Businesses
One bank that’s taken a less conservative stance is Silicon Valley Bank, which has long made a business of providing banking services to startups other banks see as high-risk. One current client is Coinbase, the Bitcoin wallet and payment processor.
“On the business-to-business side, we are looking at everything on a case-by-case basis and partnering with our regulators to ensure they have as much information as is available to make informed decisions,” a spokesperson told ReadWrite.
Even so, the role Silicon Valley Bank is taking with Coinbase appears to be performing dollar-denominated money transfers. It’s not stashing bitcoins in a digital vault. SVB may well be the most Bitcoin-friendly bank in the country, but it still doesn’t have enough clarity on regulations to offer bitcoin-denominated accounts to customers.
In Europe, Sofort, a payments service which works with about 400 banks in the region, announced it would allow bitcoin purchases through 247Exchange.com. But after just a few weeks, 247Exchange announced that the service was “unavailable.”
Expect these fits and starts for a while. The most progress has occurred in New York, where the New York Department of Financial Services has proposed a Bitcoin license whose regulations would be less burdensome than those for a state-chartered bank. But that would help new Bitcoin businesses more than it would banks.
“I don’t think [banks] are a high priority with lawmakers,” said Dorado. “The much higher priority is creating regulatory certainty for companies that want to enter the market and don’t want to be regulated as banks.”
That may help entrepreneurs and investors looking to make big bucks off of Bitcoin. But for those of us who just want to make bitcoins part of our everyday spending, that’s not good news.