UBS Dubs Bitcoin "Problematic Currency, Interesting Payment System"

Swiss global financial outfit  has on bitcoin today entitled Bitcoin and Banks: Problematic currency, interesting payment system.

The thirty-six page report takes an in-depth look at the digital currency and its effects on today’s financial systems (or lack thereof, according to UBS).

In principle, Bitcoin works very well as a sort of secure digital token system – ‘cowrie shells in the sky’. However, as a stable store of value and unit of account, Bitcoin clearly struggles, and there is no obvious remedy given the impossibility of regulating the money supply to stabilise Bitcoin-denominated prices. As well as breeding volatility, even in an optimistic scenario this provokes deflationary pressure. This problem is compounded by the lack of a real ‘Bitcoin economy’.

With regard to bitcoin’s relations to banks:

In practical terms, we find it unlikely that Bitcoin (or something similar) could pose a threat on a systemic scale – not least because existing authorities would have to get involved, but also because of Bitcoin’s various failures as a currency (discussed above). In sum, disintermediation would require an alternate, price-stable store of value, and Bitcoin – and digital currencies in general – have failed in this regard, thus largely mitigating this risk.

So, perhaps as expected, a multi-billion dollar firm finds bitcoin interesting but doesn’t quite think it will make a splash. Are you surprised?

That doesn’t mean they aren’t willing to get their hands in the pot:

Taking this sort of ordinary financial servicing one step further, banks could also start offering elementary hedging products to businesses which deal in Bitcoin or another digital currency – contingent on being allowed to do so by regulation. This would be particularly helpful for businesses in the context of Bitcoin’s volatility, which currently forces a lot of businesses to convert to fiat currency at the end of every day. These products would be a marginal source of fee revenue, but could equally turn into a threat if banks find themselves unable to create such a swaps market (e.g. due to regulation). If (and this is a big if) businesses were to start dealing with digital currencies in significant volumes, a third party or new entrant could offer the required hedging services. Ultimately, however, at those volumes a business would require fairly sophisticated hedging and financing services, which a bank would be best placed to provide and the regulator would have to get involved in any case.

The report goes on to mention bitcoin’s Achilles’ heel, the 51 percent attack, in addition to a number of other topics. Should you be interested in reading the report in full, follow this link.