Bitcoin not a threat to banking system...yet

Bitcoin not a threat to banking system...yet

Bitcoin is still more of a curiosity than a threat to the banking system but in the long term the crypto-currency could have a pronounced impact on payments, according to a group of advisers to the US Federal Reserve.

Bitcoin and its potential threat to the banking system, economic activity and financial stability came up at the most recent quarterly meeting between the Federal Advisory Council (FAC) and the Fed's board of governors, minutes (PDF) show.

When it comes to the banking system, the meeting concluded that bitcoin poses no near-term threat thanks to its tiny share of the global payments market and the challenges it faces - such as security concerns - in driving adoption.

In the longer term, however, the group say that the crypto-currency's low transaction fees, fast settlement and geographic flexibility could see it pose a real threat to traditional players, especially in developing markets.

Payment processors will need to adapt to bitcoin while banks could take advantage by becoming more involved in fund flows, especially as multicurrency accounts proliferate and reputational concerns subside.

The bankers also see potential benefits for merchants, which could ride the wave of a bitcoin boon. The currency should open new markets to sellers while capital flows will be driven from the developed to the developing world, increasing consumption.

As for bitcoin's impact on broader financial stability, the meeting concluded that while there are concerns over volatility and security, these do not pose a wider threat.

On regulation, bitcoin exchanges should be made to ensure that they protect customer funds and strong anti-money laundering rules should be in place. The meeting participants also warned of the dangers of balkanization, urging a consistent regulatory approach across geographic areas.

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