Will cryptocurrency be the new normal?

Bitcoin isn’t the only virtual currency on the block anymore. Newer players like ether and litecoin are arriving all the time. We ask how soon they will become the new normal—and whether there are opportunities for community banks to cash in.

By Cheryl Winokur Munk

As virtual currencies gain traction worldwide, many US banks are still on the fence, but industry watchers predict it’s only a matter of time before the trend takes hold.
They believe virtual currencies like bitcoin (the most widely adopted digital currency today) are the wave of the future and are poised to overtake cash as the payment method of choice. Some banks have already started to dabble in the virtual currency space, and consumer interest is beginning to pick up.

“There is a growing number of really cool ways to pay,” says Pam Brodsack, senior vice president of development for CO-OP Financial Services, a provider of payments and financial technology to credit unions. “While the eventual winner or winners of the digital-payment race jockey for position, consumers will be along for the ride. They’ll want their trusted financial institutions to help them stay safe while test-driving some of these hot-rod payment vehicles.”

To be sure, many banks are still testing the waters with respect to virtual currencies—and many are hesitant to dive in too deep. For instance, Jamie Dimon, chief executive and president of JPMorgan Chase & Co., has publicly aired his concerns about bitcoin and digital currencies. In another example, Marouane Garçon, founder and portfolio engineer of Loch Loyal, a private blockchain investment firm, says he has heard horror stories from friends trying to convert their bitcoin to US dollars and having their bank accounts closed after attempting to conduct multiple transactions. “Banks have to get with it, or they are definitely going to get left in the dust,” he says.

“While the eventual winner or winners of the digital-payment race jockey for position, consumers will…want their trusted financial institutions to help them stay safe while test-driving some of these hot-rod payment vehicles.”
—Pam Brodsack, CO-OP Financial Services

Some banks are embracing the trend. Rob Viglione, cofounder of ZenCash, a privacy-centric digital currency, points to a partnership between $75 billion-asset USAA and Coinbase, an online platform for buying and selling bitcoin, ether and litecoin—three of the most prevalent types of virtual currencies. Through the Coinbase Connect feature, USAA members can see their Coinbase wallet balance on the bank’s website and mobile application, though they can’t make purchases at this time.

Meanwhile, a group of large international banks is reportedly banding together to create a new type of digital money—dubbed the “utility settlement coin”—to settle financial transactions using blockchain, a digitized, decentralized, public ledger of all cryptocurrency transactions.

Regulators, too, are starting to give digital currencies more consideration. The Federal Reserve recently indicated in a report on strategies for improving the US payment system that it will continue to study and solicit input on how distributed ledger technology and cryptocurrencies fit into a “safe, efficient and resilient” payments system. This past summer, the Securities and Exchange Commission (SEC) issued guidance on the regulation of initial coin offerings (ICOs), which occur when a cryptocurrency startup wants to raise money.
There are other indications, as well, that virtual currencies are taking root. For instance, Burger King recently announced it would test WhopperCoin on a distributed ledger platform. “It doesn’t get more mainstream than fast-food burger chains,” Brodsack says.

Jon Holmquist, head of marketing for the US branch of bitFlyer, a Japanese bitcoin exchange, likens the situation to the slow trajectory of digital banking acceptance. Although it took time for banks to embrace online and mobile banking, nowadays it’s difficult to find banks that don’t have an online or mobile presence. “I think the adoption curve is going to be similar,” he says.

Indeed, industry watchers expect to see more adoption of virtual currencies over time, especially as digital currencies become more widely used outside the United States. Philip Au, cofounder of Crypto Explained, a cryptocurrency research firm in New York, points to international companies like TenX and Monaco card that provide users with a physical card to spend cryptocurrencies in the real world. These cards are initially used in parts of Asia and Europe, but Au says he expects to see more companies working on bridging the gap between cryptocurrencies and traditional fiat payments in the future. “There will be more in the future; they just need to get up to speed on the technology and how it will interact with the traditional banking system,” he says.

“Smaller banks could leapfrog and get ahead by starting to help their customers to have access to this market.”
—Rob Viglione, ZenCash

Digital currencies are also poised to become another form of mobile payment. “In the next five years, I would not be surprised if my traditional banking app includes a virtual currency wallet built in,” says Joshua S. Rosenblatt, an attorney at Frost Brown Todd who co-chairs the law firm’s blockchain and digital currency practice.

Observers predict that at some point, digital currencies could even replace cash—though the timeline for that is farther off. “I am totally sure that cash will disappear from turnover in some time,” says Anti Danilevski, chief executive of KICKICO, a fundraising platform.

It’s too soon to tell which virtual currency or currencies will prevail. While bitcoin is the largest by market cap, it’s still early to predict its long-term staying power. James Song, managing principal of Faircap Partners, a private-equity fund based in Myanmar that is building virtual currency technology, says he expects a clear winner to arise over time: “The market will take care of itself.”

Song compares the situation to competition in the smartphone market. “Even though iPhone had dominance in the beginning, more people around the world [today] use Android phones than iPhones,” he says.

Many large banks’ cautious approach to digital currencies is a potential opportunity for community banks. “It’s one area where smaller banks could leapfrog and get ahead by starting to help their customers to have access to this market,” Viglione says.

Banks need to understand that more and more customers are going to want to use cryptocurrencies as payment and get on board with that trend, Garçon says. Instead of making it harder for customers, banks need to find ways to make it easier for them to trade digital currencies.

“You just don’t want to be that dinosaur,” he says.

Banks can also help educate customers about how to use cryptocurrencies securely, says Areiel Wolanow, managing director of Finserv Experts, an independent consultancy in London that offers advisory and delivery services in blockchain and cryptocurrency.

“If community banks can give their customers low transaction costs and answers on how to do this securely, they’re going to make the path to adoption that much easier,” he says.

Cheryl Winokur Munk is a writer in New Jersey.

Are we moving toward a cashless society?

While cryptocurrencies are an up-and-coming trend, industry observers predict cash will be king for many years to come.
Paper money has been around since the 12th century, and it won’t be phased out overnight, says Areiel Wolanow of Finserv Experts.

Certainly, trends outside the US are propelling the move toward virtual currency adoption. Other countries around the world are making more effort to get rid of cash as a form of payment—which paves the way for cryptocurrencies to gain ground around the world and in the US, says Loch Loyal’s Marouane Garçon. In China, for instance, everyone pays using WeChat, a Chinese social media app that allows instant messaging and payments. Garçon says he recently spent a week in China and never used cash. “There was no need,” he says. “If you don’t have WeChat in China, it is incredibly difficult to pay for things without it.”

The US is well behind those trends. Wolanow predicts it will take at least 30 to 40 years before cash disappears as a payment method here. “I do think we’re headed in that direction, but the complete elimination…of paper money will take a lot longer,” he says.

To get to that point, regulations must change and market realities need to shift. At some point, when it becomes prohibitively expensive for consumers to use paper money, they will no longer want to incur the extra costs. When that happens, that’s when “you will see paper currency phased out,” Wolanow explains.

Until that day comes, cash will continue to be a no-frills way to pay for many transactions, says Joshua S. Rosenblatt of law firm Frost Brown Todd.
“There are certain activities like tipping a valet where cash is the most convenient,” he says. “I think that’s a cash transaction for the foreseeable future.”
—Cheryl Winokur Munk