As the world becomes more digitized and more and more financial transactions happen electronically, we’ve seen a huge surge in popularity among cryptocurrencies in general, and bitcoin especially, as more people come to see it as a legitimate form of currency. An increasing number of vendors and merchantsnow accept bitcoin as payment (including known brands like Microsoft and Expedia), and bitcoin ATMs are even springing up in locations around the globe. This trend has raised speculation as to bitcoin it could one day supplant centralized banking as the primary form of finance. Could central banks one day become obsolete or unnecessary? Could we soon transact all business with digital currency? Let’s begin by exploring how we got here, then discuss some different aspects of this question.

A Bit of Context

Up until recently, cryptocurrency has been largely the domain of speculators—and with good reason. In July 2010, the dollar value of one bitcoin was USD $0.125; as of Sept. 30, 2019, one bitcoin was worth USD $8,463.92. If you bought $1000 worth of bitcoin in July 2010, it would be worth nearly $68 million today. (If you sold it at its peak value in December 2017, you’d have more than twice that amount!) 

While the exchange rates continue to fluctuate more widely than some are comfortable with, the fact remains that bitcoin has grown considerably in value and now appears to be holding its own—leading consumers and merchants to view it more and more as a valid form of payment. If trends hold, it’s quite possible that going “all digital” would be a natural next step, especially among those who favor a decentralized economic system.

A Threat to Banking Systems?

There’s a growing body of evidence to suggest that banking systems around the world do see cryptocurrency as a potential threat. A UK Banking Reportrefers to the phenomenon as a “digital disruption,” noting that bitcoin users can bypass banks completely in their transactions, which means the banks can’t collect their usual fees. Agustin Carstens, chief of the Bank for International Settlements (BIS), recently raised the notion that central banks might soon begin issuing their own forms of digital currencyin an attempt to stay competitive.

Challenges and Concerns

The prospect of an economic system functioning on bitcoin raises mixed emotions on both sides. While proponents celebrate the idea that bitcoin effectively neutralizes a banking system they see as greedy and predatory, the lack of regulation in this market could also be viewed as a new “wild west”, a breeding ground for a whole new set of predatory practices. Additionally, without some stabilizing force in place, the fluctuating values of bitcoin can still potentially wipe out entire fortunes in a day. Any attempt to supplant central banking with digital currency would need to include discussions on how to resolve these and other questions.

Possible Outcomes

Will bitcoin eventually unseat centralized banking? Currently, we see three possible outcomes: 

  • Outcome 1:Bitcoin becomes the preeminent form of currency once stability and regulation issues are resolved.Central banks don’t close down immediately, but instead become increasingly irrelevant and fall into obscurity. In this scenario, the middle man would essentially be cut out whenever transactions occur. In other words, businesses would transact directly with consumers using crypto currencies.
  • Outcome 2: Central banking learns to “get along” with bitcoin and/or other forms of cryptocurrency.Industry innovators find ways to integrate digital currency into their offerings, renewing the relevancy of central banks for another generation.
  • Outcome 3: Bitcoin destabilizes and disintegrates due to unforeseen circumstances. Fortunes are lost in the process, but central banking is there to pick up the pieces.

Which of these outcomes we see is anyone’s guess, but current trends lean toward one of the first two. Either central banking will learn to get along with bitcoin, or bitcoin may eventually take over.

Helping You Anticipate the Future

At MelroseINC, we are on a mission to help companies anticipate new technologies and prepare for potential disruption. As innovations like bitcoin change the landscape, MelroseINC is here to keep you informed about the latest trends in technology.