Study: Traditional Banks Can Reshape the Cryptocurrency Market (and May Kill It)

If banks would issue digital currencies of their own, it could “reshape” the entire crypto-market by adding more competition, a new study by the European Parliament Committee of the European Union (EU) has found. The downside, however, is that banks could also thus suppress and crush their decentralized cryptocurrency competitors.

The study, labeled “Competition issues in the Area of Financial Technology (FinTech),” analyzes the current FinTech industry based on new start-ups, traditional financial institutions and big tech companies, and attempts to anticipate future hurdles and anticompetitive behaviors. A considerable section of the report is dedicated to the cryptocurrency market, emphasizing its importance as part of the future.

Although presently traditional banks – let alone central banks – don’t particularly fancy cryptocurrencies, the study suggests that they could benefit from entering this arena, and even stifle the current players through all sorts of anticompetitive practices.

Market power of incumbent banks might be used to limit competition in the intracryptocurrency market through pre-emptive acquisitions or predatory pricing schemes. Incumbent banks may also engage in anticompetitive practices by denying access to their gateways for exchange or wallet services, such as bank payment and transfer systems or card processor schemes. This denial of access may be conducted by means of low service quality, delays in negotiation, proprietary technical standards or excessive pricing. These practices may deter consumers from using the permission-less cryptocurrencies in favour of the permissioned ones promoted by banks.

To make this prediction more accurate, I think we can replace the words “might be used” with “will surely use.”

The study also points out to the monopoly of Bitcoin within the current cryptocurrency market, even though its market share did decline: in March 2015, Bitcoin’s market capitalization was 86% of the entire market, and in March 2017 it fell to 72%. Alongside Ethereum – whose market capitalization out of the total was 16% in March 2017 – the two cryptocurrencies were responsible for almost the whole crypto-market, leaving only scraps to others.

The crypto-market also suffers from high degree of concentration in the areas of mining and crypto exchanges. In the fourth quarter of 2016, 79% of the total mining share belonged to merely the five leading mining pools; the good news here is that none of them utterly dominated the area. As for exchanges, five providers are responsible for 75% of the total exchange market share, although there are many exchanges out there.

From a European perspective, whilst Europe does lead in many areas, the report indicates that due to the global nature of crypto it “makes investigation or prosecution on anticompetitive behaviours more difficult.” Europe leads the world with the biggest share of wallet services (42%), exchange services (37%) and payment services (33%); yet, Europe only holds 13% of the mining activity which “is the most strategic, sophisticated and technology dependent activity in the cryptocurrency market.”

So… if banks will get into the crypto-market, does it mean that cryptocurrencies are doomed? Not necessarily. Even if central banks will try to suffocate cryptocurrencies such as Bitcoin and Ethereum, it does not mean that customers will automatically rush to the banks’ own digital currencies; Bitcoin has undergone a lot of hurdles and obstacles so far and it is still here. It’s also worth mentioning that we might see more links between decentralized crypto organizations and traditional banks, as the recent case of Litecoin and TokenPay which have acquired shares in a German bank.