Bitcoin Could Be the Future of Moving Money Around

By Kevin Roose Big financial institutions could use bitcoin to move money across borders. It's been a hell of a week for Bitcoin, the digital crypto-currency turned Internet punch line. First, the price of a single Bitcoin jumped up past !"", after spending months hovering in the #"" to $"" range. %hen, it got an impressive imprimatur in &ashington, with Fed chairman Ben Bernanke saying that the currency may hold 'long-term promise.' %hat comment, along with a letter from the Federal (eserve Bank of )hicago that called Bitcoin 'a remarkable conceptual and technical achievement,' sent prices even higher. *t one point, Bitcoins were trading for +"" apiece ,meaning that if I'd held on to my one Bitcoin instead of selling it earlier this year, I'd have made enough to buy the i-ad *ir I've been coveting.. I agree with %imothy /avin that the price swings of the last few weeks are a bad sign for Bitcoin's long-term viability, since no currency with such cra0y volatility will ever be trusted as legitimate money. But I think there's a solution to all of this1 Bitcoin needs to give up on its dream of replacing fiat currency, and focus on becoming something both much bigger and much more mundane1 an invisible middle-man for the global payments system, which is currently way too e2pensive and outmoded. (ight now, the process of moving money around the world is a nightmare. 3ost cross-border payments are made with the help of one or more of two systems1 4&IF% and )5I-4 ,4ociety for &orldwide Interbank Financial %elecommunication and )learing 5ouse Interbank -ayment 4ystem, respectively.. In very basic terms, 4&IF% is the alert system for payments 6 it tells banks when money has been sent and received 6 and )5I-4 is the bookkeeper that actually does the tallying and transferring. For e2ample1 If I want to wire #,""" to a friend in 7apan, my bank, which has a uni8ue eightdigit 4&IF% number, looks up the eight-digit 4&IF% number of my friend's bank in 7apan, and sends that bank a message containing the amount of the transfer, the type of asset being transferred, the names and account numbers associated with the transfer, and the date and time of the transfer. *fter my friend's bank gets the 4&IF% message, it processes the transaction using )5I-4, a different system that simultaneously debits my account in 9.4. dollars and credits my friend's account in 7apanese yen, using the e2change rate at the moment of the transfer. ,* more complete e2planation of the process, which is e2tremely complicated and involves lots of conceptual overlap, can be read about in this Fin)en report.. %he reason it often takes a day or more to complete an international money transfer is because there are lots of intermediaries, each of which can drag its feet in settling payments. It's also annoying for banks, which is one reason they charge e2orbitant fees. ,*t )hase, for e2ample, you'll pay :" for an international wire payment, and :; if it's denominated in a foreign

currency.. %he system for sending money between banks inside the 9.4., using a service called *)5, is almost as complicated, which e2plains why start-ups like <wolla are trying to build better, cheaper clearing systems. %his is where Bitcoin could be incredibly useful. Imagine using Bitcoin as the invisible middle layer in a cross-border transaction. =ou'd ask your bank to send #,""" to your friend in 7apan, and immediately, your bank would convert your 9.4. dollars into Bitcoin, place the Bitcoin into a secure virtual wallet, and send it to a Bitcoin wallet held by the 7apanese bank, which would then convert it into local currency and credit it to your friend's account. In a system like this, it wouldn't matter if Bitcoins were trading at !"" or ! million, since the money would only stay in Bitcoin for a millisecond or two before being converted into another country's currency. In fact, you wouldn't necessarily need to know that Bitcoin had been involved at all 6 all you'd see is 9.4. dollars leaving your account, and 7apanese yen appearing in your friend's account. %his would be massively cheaper than the current system. Banks might still charge a pertransaction fee for a Bitcoin-based wire system, since there would be costs associated with setting up the technology needed to make it happen securely. But once a solid platform had been developed, there'd be no reason for them to charge anywhere near :" per transfer. ,>f course, you could cut out the banks entirely by creating a peer-to-peer Bitcoin conversion platform, but that would carry its own risks.. %he downsides of this plan, as with most Bitcoin-related schemes, would be in the realms of security and regulation. Bitcoin theft is still a massive problem, and with so much money flying around the world every day ,)5I-4 processes an average of #.: trillion daily., the risk that hackers would pick off a portion of that money is non-negligible. * friction-free payment wire system would also be catnip for money laundering and other illegal transactions, so you'd have to build in enough tracking and compliance features to make it kosher with regulators. *nd banks, who like their wire-transfer fees, would have to be convinced to participate. But if a Bitcoin-based instant global money transfer system, with fiat-denominated bank accounts at either end, could be worked out, it would save companies and individuals billions of dollars a year in fees and processing costs. It would make sending cash around the world as easy as sending e-mails. *nd it would give Bitcoin a reputation as something truly useful, not just a crypto-libertarian plaything. First, though, Bitcoin enthusiasts would have to give up on the dream of a universal currency that is treated as money and accepted at stores all over the world. Bitcoin is too inherently volatile to be trusted, and normal people will never be convinced to give up their government-backed money for a math-based currency. Instead, everyone currently building venture-backed Bitcoin gi0mos should refocus their efforts into developing a secure, stable platform for cross-border payments, using Bitcoin as the new and improved middle layer. Bitcoin may not be the future of money, but it could very well be the future of moving money around.