Citibank warns bitcoin poses threat to credit, debit card issuers

Major United States financial institutions have published reports that highlight the past, present and future of the peer-to-peer decentralized virtual currency bitcoin. Most of the reports allude to the innovative bitcoin technology and say that it doesn’t have viable alternative currency methods.

This week, Citibank published a new report that reiterated what other banks have stated previously: bitcoin could very well challenge or surpass traditional payment services over the next several years.

Citi GPS, a publication owned and operated by the financial institution, discussed how the technology that is behind digital currencies could trump conventional day-to-day payment services, such as credit and debit cards and transmittal services. However, it noted that the price volatility and security risks could hinder any growth in bitcoin.

“The essential innovation in bitcoin is that it can eliminate the need for a ‘trusted intermediary’ when the principals in a transaction do not trust each other,” the report stated. “There are many such transactions but money transfer/ credit/ debit card transactions stand out.”

In addition, the report compared both industries and their valuation: the global payments sector is worth more than $300 billion, while the bitcoin market capitalization is estimated to be valued at $6.2 billion. With more than $15.5 trillion in credit and debit card transactions taking place last year, digital currencies like bitcoin could disrupt the immense sum with its low-cost transactions.

“Bitcoin transactions have potential cost advantages over conventional payments and reduce the need for intermediation,” the report added. “The gap between conventional transactions cost and any bitcoin fees for convenience and increased security will allow bitcoin to make incursions into this market.”

Citi also cited litecoin, dogecoin and blackcoin as potential virtual currencies that could gain a “significant” percentage of the market share.

If virtual currencies become more ubiquitous in the international economy then businesses that offer credit and debit card services could face enhanced competition from digital currencies and hurt their current business models.

“If fraud/chargebacks can be reduced or eliminated by digital currencies there is plenty of room for margins to be eroded,” the report noted. “Retail transactions across borders could also become very inexpensive, if the charges involved in going from one currency to another were substantively reduced.”

The report went onto explain that governments would receive tremendous benefits if the marketplace adopts bitcoin. Some of the benefits consist of increasing tax collections, transferring money into the formal economy, financial inclusion and increasing efficiency in transfer payments.

It concluded the report with this statement:

“Digitization in general and adoption of digital money solutions in particular, is not a question of ‘if’, but ‘when’. Doing nothing simply means allowing the system to develop dysfunctionally, in fits and starts. It also means delaying the tremendous socio-economic benefits that adoption can bring. Inaction is not an option. There is too much at stake.”

At the time of this writing, bitcoin is trading at around $660, up from $450 last month.

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