Cryptocurrencies Shed ‘Bad Boy’ Image

Bad Boys

The general public is waking up to the fact that cryptocurrency technology isn’t a ponzi scheme, a way to buy drugs online, or a means to evade taxes and fund terrorists—but a potentially game-changing innovation that could finally bring finance into the digital age.

The change in broader sentiment was confirmed Tuesday in a speech delivered by David S. Cohen, Secretary of Terrorism and Financial Intelligence for the US Treasury, titled “Addressing the Illicit Finance Risks of Virtual Currency.”


Cohen was quick to acknowledge the technology’s transformative potential:

As you all know, there is intense, albeit perhaps not universally shared, enthusiasm for virtual currency. That enthusiasm is based, in part, on its novelty, its tech roots, and its supposed distance from governments, central banks, and regulators. It also flows from a belief—shared by consumers, businesses, and investors alike—that virtual currencies have enormous potential to empower users, lower transaction costs, increase access to capital, and bring financial services to many unbanked individuals all around the world.

While also pointing out the risks:

Now, one often hears virtual currency compared to cash. And to an extent, this analogy has merit. But one way virtual currency is different from cash, and different from other established payment mechanisms, is that users of virtual currency today can transfer value – around town, across the country, and over oceans – in the blink of an eye with comparatively little or, in some cases, no regulatory oversight. This poses clear risks to consumers and investors alike. For consumers, anonymity and transaction irrevocability expose them to fraud or theft. And unlike FDIC insured banks and credit unions that guarantee the safety of deposits, there are no such safeguards provided to virtual wallets. Similarly, investors in virtual currency today lack the standard protections applied to the purchase of a security or a commodity.

But perhaps the key point was the conclusion that there was little evidence suggesting criminal activity:

To be clear, we do not currently see widespread use of virtual currencies as a means of terrorist financing or sanctions evasion. The volatility associated with virtual currency, combined with its low capitalization and liquidity, has limited its appeal to these illicit actors. Terrorists generally need “real” currency, not virtual currency, to pay their expenses – such as salaries, bribes, weapons, travel, and safehouses. The same is true for those seeking to evade sanctions.

That’s huge, given how the technology has often been portrayed in the news thanks to the now defunct Silk Road, the arrest of BitInstant Charlie Shrem for alleged money laundering charges, and most recently, the messy demise of MtGox.

Cohen’s speech came just days after the Bank of England released its quarterly bulletin, which included an entire section for digital finance, outlining how cryptocurrencies differ from other offerings.

When I spoke to Rainey Reitman of the Electronic Frontier Foundation last summer at the bitcoin conference in San Jose, her greatest fear was that government officials might use terrorism or child pornography as a reason to slip stifling rules regarding digital currencies into new legislation. It’s now clear that regulators are taking a more open and pragmatic approach.

It’s this approach that opens the door for broader adoption or, at the very least, thoughtful discussion from prominent establishments, like Goldman Sachs’s recent 20-page report analyzing bitcoin. “Bitcoin Exits Mt. Gox and Heads to Wall Street,” announced Institutional Investor.

Indeed, Morgan Stanley is the only major Wall Street bank that has yet to officially cover the protocol. While the company’s CEO James Gorman labeled bitcoin “surreal” earlier in the week, admitting that he didn’t understand it, the firm is nonetheless holding a bitcoin event Thursday, perhaps in a better-late-than-never effort to hop on the increasingly crowded bandwagon.

In other words, the major players are finally starting to “get it” (even if some, like Gorman, don’t fully comprehend what that really means yet).

But for banks, that can only be a good thing, as we argued last week. A crypto-makeover would not only open up new markets, provide new business models, and improve operational efficiency, it could rejuvenate the industry’s image among Millennials, who view banks as boring, old fashioned, or, worst of all, possibly irrelevant.

And now with cryptocurrencies winning the battle against public perception, industry incumbents—who, in recent times, have been waging their own PR war—can finally start asking the right asking the right questions.