How Bitcoin, Blockchain Could Rule Financial System

Imagine being told one day that your paychecks would be in Bitcoin. Pretty cool, right? Except your liquid assets could tumble in value at any moment in this cryptocurrency future. And you’d have to convert your cryptocurrency to dollars to buy groceries at Walmart (WMT), coffee at Starbucks (SBUX) or books on Amazon (AMZN).

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The surge in value of Bitcoin and its digital currency rivals has not been matched by their everyday utility. Payment processor Stripe cut off Bitcoin support in January, citing slow transaction times and high fees.

“We’ve seen the desire from our customers to accept Bitcoin decrease,” explained Stripe product manager Tom Karlo.

Bitcoin and other digital rivals are nowhere near ready for prime time. They might never match the utility of today’s financial-system incumbents, the banks and payment companies that facilitate the flow of funds over tens of millions of merchant locations.

Yet much like millennials will never have a landline, a coming generation might do without bank accounts thanks to secure, peer-to-peer cryptocurrency transactions. Blockchain technology and the vast new crypto wealth have opened the door to four cryptocurrency futures that could usher in a new financial order.

Four Cryptocurrency Future Scenarios

What are these possibilities?

The Federal Reserve could issue its own digital currency, as some global central banks are exploring.
Large companies such as Amazon, Walmart and Starbucks might issue digital coins that inspire trust and gain wide acceptance.
Retail giants, by accepting payments in the currency, could elevate Bitcoin, Ethereum or another cryptocurrency above the others vying to offer safety, soundness and utility.
Finally, if  trust is lost in government-backed, or fiat, currencies, a cryptocurrency future could come about by default. That may be a risk not only in places like Venezuela, but in the U.S., where federal deficits are spiraling.

“Virtual currencies might just give existing currencies and monetary policy a run for their money,” International Monetary Fund director Christine Lagarde predicted last fall. “Citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash — no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities,” she said.

That explosive potential helps explain why so many tech entrepreneurs and investors turned cryptocurrencies into a 21st Century gold rush, even as JPMorgan Chase (JPM) CEO Jamie Dimon has trashed Bitcoin as “a fraud.”

Dimon and other titans of finance voice certainty that commercial banks will remain indispensable, cryptocurrencies will stay on the fringe, and governments will want to keep it that way.

FedCoin? Central Banks Mull Future Of Cryptocurrency

Blockchain’s potential to revolutionize the financial system has some central banks studying whether to issue their own digital currency. Yale University scholars have proposed the FedCoin. In this cryptocurrency future, FedCoin could make monetary policy more flexible and forceful, even allowing for negative interest rates.

If a cryptocurrency acted as a reliable, widely accepted store of value, people could cut ties to their banks. They could keep some crypto cash in digital wallets, with other liquid assets in mutual funds, stocks and government bonds.

A Bank of England study concluded that a central-bank cryptocurrency could boost GDP by 3%. Gains would come, in part, from shrinking “monetary transaction costs that are analogous to distortionary tax rates.”

Yet FedCoin looks far-fetched at present because of the massive disruption it could cause. Central bank crypto dollars “could endanger the economically and socially important financial intermediation function of commercial banks,” JPMorgan analysts warned.

The contribution of fractional reserve banking to global growth — turning each $1 of deposits into $10 in loans — could fade. “We would expect that central banks would think twice before disturbing this source of capital to the private sector.”

Bitcoin Crash Or Cryptocurrency Revolution?

Dimon is surely right about one thing: The cryptocurrency future will depend heavily on government. That could mean smothering it with regulation, stealing its thunder via FedCoin or cultivating it with a light regulatory touch.

Bitcoin hit its 2018 low early on Feb. 6, the morning of a key Senate cryptocurrency hearing, briefly undercutting $6,000. The chairmen of the Securities and Exchange Commission and Commodity Futures Trading Commission both urged stronger oversight. But the financial regulators stopped short of sounding an alarm. Nor did they call for any legislation to rein in cryptocurrencies. In the weeks after that hearing, Bitcoin rebounded to around $11,000 but it has retreated yet again to below $8,000.

Bitcoin had doubled in the first half of December, hitting a peak above $19,000 just as Bitcoin futures began trading…

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