Bitcoin vs. the Banks: A Blockchain Without Bitcoin?

The debate over Bitcoin’s future relationship with the banking system has come a long way in the last year. In 2014, the discussion was speculative for the most part, as major banks had not yet weighed in on the digital currency. However, in the first half of 2015, banks began taking more interest in Bitcoin. More specifically, several banks have been exploring the possibility of integrating the blockchain with their financial systems, allowing them to have the speed and low cost of Bitcoin, without actually using Bitcoin.


Thus, the debate over how banks will treat Bitcoin has drastically changed. It has gone from a discussion filled with conspiracy theories about banks trying to destroy Bitcoin to one considering the best ways banks can take advantage of the digital currency. Now, the question is: which will end up winning, Bitcoin, or blockchain-powered banks?
At first glance, it may seem like banks have an obvious advantage that will allow them to push Bitcoin out of the picture while keeping the blockchain. Banks have millions of patrons, and they deal the in the legal tenders of their national governments, currencies that everyone already uses. Bitcoin is an extremely new currency based on an experimental technology. Compared to fiat currency, only a handful of people use Bitcoin, and there are no Bitcoin financial institutions that are as popular and as trusted as a bank. Therefore, it seems highly likely that a more realistic, mainstream implementation of Bitcoin’s technology is the banking system’s adoption of the blockchain. The wire transfer system can be replaced with a blockchain, allowing banks to send money anywhere in the world instantly and with virtually no cost.
Such an upgrade to the banking industry would certainly be a boon for the public. Banking would become more streamlined; there would be virtually no wait times for people to receive international payments, and transfer costs would be drastically lower. Money transfers would become more reliable as well, since people would be able to track their transfers in real time on blockchain explorers provided by the banks. Essentially, people would be able to enjoy the most significant advantages Bitcoin has to offer without enduring the learning curve involved in using Bitcoin. So, choosing blockchain-powered banks seems like a no-brainer, right?

Not exactly. Even if banks so decide to utilize the blockchain, the banking system — and the financial sector in general — has some problem areas that cannot be solved by a simple adoption of blockchain technology. It is possible that these flaws may be embedded in the system as an inherent feature, and cannot be improved without a complete overhaul of the system. Banks have a seemingly unbreakable relationship with the public sector, opening both the government and the banks to corruption and cronyism. If we accept public choice theory as valid, such relationships between the government and vital private institutions may be an inevitability that can only be stopped through major reforms. Additionally, history has shown that banks are prone to massive failures during economic crises; arguably, the banks themselves are the cause of the crises. In these failures, people lose all their savings, their livelihoods. Such calamities cannot be prevented by a simple blockchain adoption. Furthermore, that strong relationship between banks and government ensures that banks will be bailed out without being held accountable for their actions. Therefore, the economy is thrown into an endless cycle of economic hardship.

Bitcoin’s advantage comes in its ability to solve those banking problems that cannot be fixed by adopting the blockchain without Bitcoin. Since Bitcoin is an actual currency is tied to a blockchain, users can have instant transactions and extremely low fees without going through an inconvenient middleman. Bitcoin’s decentralized nature makes it next to impossible for one person or organization to form special interest relationships with governments and turn the Bitcoin network into a system of cronyism. The digital currency has scarcity embedded in its protocol; that, combined with the blockchain’s open ledger, would make fractional reserve banking impossible, the very practice that may actually cause the perplexing and devastating business cycle. (Unless Bitcoin users put their coins in a bank that uses off-chain transactions). Bitcoin has the potential to create a totally incorruptible economy — something public choice economists have tried to do through government reform for decades.Still, Bitcoin’s chances at beating blockchain-powered banks seem slim. The economics of business cycles are still up for debate. If fractional reserve banking actually does not cause harmful recessions, then there is no need to have a currency that is scarce and independent of banks. Bitcoin’s learning curve may also be too steep for many people, leading them to prefer the familiarity of traditional banks — despite all their flaws. Finally, most people do not actually care about the problems banks cause, and are not interested enough in the financial system’s problems to care about finding a solution. Unfortunately, it may take an unprecedented economic crisis — one that hurts hundreds of millions of people — for the general public to start caring about building a stable economy.However, should we really be discouraged if the banks adopt the blockchain and leave Bitcoin behind? Of course not! At the end of the day, we still will have gained a drastically improved banking system, making it cheaper and more convenient to send money across long distances. Blockchains will make banks at least slightly more accountable, regardless of whether the blockchain processes Bitcoin or fiat payments. Besides, it isn’t like these blockchain-bank hybrids will completely kill Bitcoin. On the contrary, having banks that use a piece of Bitcoin’s technology will make the digital currency a more trusted option when we inevitably do have serious discussions about fixing the financial system. Plus, Bitcoin has countless financial applications outside of banking, such as remittance payments, that will continue to be developed, and the Bitcoin community will continue to grow and thrive around these new innovations. Bitcoin won’t go away just because it cannot immediately kill the banks. There is nothing to be afraid of; regardless of how Bitcoin and the blockchain end up being used in the mainstream economy, it can only lead to an improvement in everyone’s lives.



How do you think Bitcoin will ultimately be used in the mainstream economy? Let us know in the comments below!
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Evan Faggart

Evan is the Senior Editor of He has a bachelor's degree in History with minors in Economics and Political Science. When he's not acting like he knows what he's doing in the newsroom, Evan is most likely playing video games. Follow Evan on Twitter @EvanFaggart.

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