The relationship between banks and bitcoin has grown fraught. Banks such as JPMorgan Chase, Bank of America and Citigroup have all banned the purchase of bitcoins on their credit cards, and Capital One and Discover have both had bans in place for some time. While blockchain enthusiasts have been quick to label this a reaction by old, stale institutions to the disruptive cryptocurrencies, the reality is far more prosaic.
Banks simply don’t trust bitcoin. Here are three excellent reasons:
Securitization of Banks and Bitcoin
Per a recent commentary in Forbes:
Bitcoin’s problem is how it works as a payment, from both a reliability standpoint and from a cost standpoint. When you add price volatility to this, these factors make bitcoin less attractive as a currency and more attractive as a store of value.
Banks have no problem trading in low-transaction currencies. Although a consumer may struggle to find institutions that keep particularly obscure instruments on hand, they rarely make institutional rules against those that few people accept. Bitcoin is different because it doesn’t function as a currency.
To function as a currency, bitcoin would need enough stability to substitute for value reliably. That is to say, a consumer who kept their money in bitcoins would need a general sense of what those tokens are worth in consumable terms today and what they’ll be worth tomorrow. A bitcoin that buys a large pizza on Monday needs to be able to buy that same pie on Tuesday. Bitcoin doesn’t function that way. Its wild price swings have rendered all but impossible the stability on which substitutes of value rely.
As a result, individuals rarely take bitcoins to spend them later. They take bitcoins in a belief that their value will rise, for the purpose of selling them later. This is not inherently bad, but instruments purchased for the purpose of accretion of value are generally considered securities, not currency, and are governed by very different rules.
Volatility and Speculation Surrounding Banks and Bitcoin
That same volatility also makes bitcoin a risky asset to associate with debt.
Speculation is the process of debt-fueled investing. During a speculative trade, an investor will borrow sums of money to purchase their investments, counting on the profits to pay off the ensuing debt. When successful, it can lead to enormous windfalls. When unsuccessful, it can ruin traders. The last time it was left unregulated, speculation caused the 1929 stock market crash.
Speculation is, as a result, tightly regulated on the stock market. But most cryptocurrencies aren’t traded like investments. They’re bought and sold like standard commodities, fitting their advertised role as digital forms of currency. The result has been a new, de-facto form of speculation in which individuals purchase cryptocurrencies (such as bitcoin) on their credit cards.
By using debt to purchase an investment asset, individuals expose themselves to potentially enormous risk in case the price falls. What’s more, they create the potential for systemic risk if too many investors all lose money and can’t pay their credit card bills. An effort to guard against that is precisely why so many banks have banned buying bitcoins with credit but not debit cards.
Major banks have never forgotten the relationship between Silk Road and bitcoins.
Now, it is important to note that no one is saying there was a formal relationship between bitcoin as a project and the notorious website. However, when the U.S. Justice Department shut down the Silk Road marketplace, it seized 144,336 bitcoin tokens. Silk Road thrived on the anonymity that cryptocurrencies promise (even if, in the case of bitcoin, a token is more traceable than many people believe).
Banks remain very concerned about future illegal use of cryptocurrencies, from funding drugs and terrorism to simple money laundering. As the number of cryptocurrency projects explode, concerns about fraud related to initial coin offerings have only heightened their fears.
Until institutions can feel comfortable that they won’t become accidental middlemen for illegal transactions, thus inviting a visit from the FBI, the SEC or the IRS, they’re likely to remain very skittish about inviting bitcoins in the front door.