How Bitcoins Could Revolutionize Global Payments — Forever

Is the bitcoin hype merited?

On Monday, bitcoins took the financial world by storm, as the value of a bitcoin soared to historical highs and the federal government essentially blessed the alternative currency. The price of ฿1 (that’s one bitcoin for all of you not familiar with the ฿ symbol) today again has climbed over the $700 mark.

But what’s the real deal with bitcoins? I would suggest that the short (and bold) answer is: bitcoins could replace traditional global money transfer channels. Sorry, SWIFT.

Until very recently, bitcoins to me were something on the order of a more substantial PayPal. Why pay for anything with PayPal, when you can bypass the temporary holder of your value (PayPal) in favor of the actual value (the bitcoin). This is a nice use case, for sure, but nothing revolutionary. There are many forms of alternative currency already in circulation.

That’s not the whole of it, however.

Bitcoin creates a virtual repository currency for foreign exchange. Say you want to send dollars to your friend in London, but don’t want to use a bank or PayPal. You could transfer those funds into bitcoins, give those bitcoins to your friend via a bitcoin wallet application like MultiBit, who would, in turn, convert those bitcoins into British pound sterling. Right now, the big delay seems to be in the buying of bitcoins, which, for anti-money laundering reasons, appears to be slowing down to up to a week for new users.

Using bitcoin to transfer funds globally could be executed not just by me, but by major corporations. I mean, why not? Consider the following 2012 data:

• Amount of wire transfers processed by Bank of America: $244.4 trillion;
• Online payments processed by PayPal: approximately $145 billion;
• Remittances made through Western Union: approximately $81 billion;
• Number of transactions processed by the Automated Clearing House (ACH) Network: 21 billion transactions with a total dollar value of $36.9 trillion; and
• Number of transactions processed by Fedwire, which handles large-scale wholesale transfers: processed 132 million transactions for a total of $599 trillion.

If you use even the most conservative estimate for the costs folded into these transactions of, say, 50 basis points, we are talking about $4.4 trillion of expenses, and that’s just for the transactions specified above. Cutting those costs to perhaps 20 basis points would save the global economy around $2.6 trillion. All in favor say, “aye.”

With ฿1 hovering over $700 today, we are clearly in a speculative bubble. A normative forex trader would consider trade and capital flows to determine an exchange rate, which is effectively impossible or irrelevant to bitcoins today — and this makes the current dollar-to-bitcoins exchange rate a speculation on the future trade and capital flows between dollars and bitcoins.

This instability, to be sure, is a hindrance. There is no central bank to control the float of bitcoins. In fact, that was the point of bitcoin’s founder — that there be no central control of the currency, at all. This factor alone could limit bitcoin’s usage.

That said, bitcoins just might facilitate an alternative channel to global payments. (If you take a moment to think about this, it is really quite remarkable. Industry upon industry has been disrupted by technology over the last 20 years. Who would have ever thought that something as staid and as establishment as global payments even had a chance of being disintermediated, but here we are …) Could it be that SWIFT, the Federal Reserve, et al would allow such a thing? Interestingly — and this was the main headline last Monday — it would seem that they might. As has been reported, Jennifer Shasky Calvery, the director of the Financial Crimes Enforcement Network, our government’s sentinel against all things anti-financial-establishment, actually said this to the US Senate Committee on Banking, Housing and Urban Affairs on Monday:

The decision to bring virtual currency within the scope of our regulatory framework should be viewed by those who respect and obey the basic rule of law as a positive development for this sector. It recognizes the innovation virtual currencies provide, and the benefits they might offer society. Several new payment methods in the financial sector have proven their capacity to empower customers, encourage the development of innovative financial products, and expand access to financial services. We want these advances to continue.

The government “wants these advances to continue”?!? Disruption of global payments just got a vote of confidence. The hurdles to bitcoin’s global advancement are many, but this vote of confidence deserves note. It’s a clarion call that SWIFT might here — “might” being the key word.