In a recent research report on cryptocurrencies, JPMorgan frames the question as whether one of the new decentralized currencies, such as Bitcoin, will be able to break the government's "natural monopoly" on currency:
"It will be extremely hard for cryptocurrencies to displace and compete with government-issued currencies, as dollars to euros and yuan are virtual natural monopolies in their regions and will not easily give up their seigniorage profits" (emphasis added)
This is exactly the question that everyone should be asking. If you think that Bitcoin could break this "natural monopoly", then you may want to buy Bitcoin. If you don't think this is possible, then don't buy Bitcoin. It's that simple.
So what is the "monopoly" that JPMorgan is referring to? The observation is that within any country the great majority of merchants use the currency that is promoted by the government. The U.S. promotes dollars through the banking system. If you want to use a bank in the U.S., you are required to use dollars. If you are a merchant in the U.S., you accept dollars because that is what the customers use. The monopoly exists because it is created by law ("fiat").
What does this sound like? Yellow cabs in New York City? Imagine JPMorgan writing a report ten years ago for a taxi medallion finance company. They may have said: "Medallion owners have a natural monopoly on cabs in New York. It would be extremely difficult for a competitor to displace the yellow cab." Right?
As Uber proved, a monopoly propped up by laws is an easy monopoly to break. Throughout the world, when Uber comes to town, the people decide whether they like the new option better, and if they do, the law changes. That's how it works in democratic countries and that's how it could play out with Bitcoin.
The analogy to Uber is not perfect. Uber had the advantage of being very easy to use from the beginning, whereas the Level 2 payments infrastructure for Bitcoin still needs to be built and the currency may not be ready for large scale adoption until its price settles at a mature level. But at some point, the value comparison of Bitcoin to fiat around the world may be as stark as Uber versus taxis. At this point the "natural monopolies" could fall quickly.
JPMorgan and other banks are now in the position of the medallion holders - they benefit from the "natural monopoly." The banks are much more powerful than cab owners, so it could be a bigger fight, but it will eventually come down to whether the majority of people want to use Bitcoin.
Do you remember when you first took an Uber ride? Maybe in San Francisco. Were you jealous? Were you angry at your city for not allowing Uber?
Imagine in the near future, somewhere in the world, a country promotes Bitcoin. Americans will travel to that country and use Bitcoin with a payment card like they use dollars in the U.S. Maybe the first time this happens they will think it is a local curiosity, but then they will go to another country somewhere else in the world and people will be using Bitcoin there also. Eventually, Americans may demand the option to bank in Bitcoin in the U.S., just like they demanded Uber in New York. If that happens, it will only be a matter of time before the "natural monopoly" of fiat currencies comes to an end.
It would be wise for American banks to embrace Bitcoin, rather than push against the tide. One way to do this would be for banks to lobby regulators to allow them to issue Bitcoin denominated deposits. This would give consumers the ability to choose among currencies from within the banking system, which is not a bad outcome for the banks. If it is not done this way, consumers may choose to ditch banks also. Don't forget, banks themselves are yellow cabs.
Author: Shane Hadden
About The Currency Report: The Currency Report promotes the adoption of a decentralized global currency. We provide advisory services to new currency designers and investors, including our fund, the Global Currency Fund. Read the Guide to New Currency Valuation and Design, sign up for our blogs or, for accredited investors, inquire about our fund. For more information contact Shane Hadden at firstname.lastname@example.org.