UBS isn’t scared of Bitcoin — but it does think financial giants could learn a trick or two from the virtual currency.
The Swiss global financial firm today criticized Bitcoin’s viability as a currency, saying its semi-fixed supply breeds volatility and provokes deflationary pressure.
“As a stable store of value and unit of account, Bitcoin clearly struggles, and there is no obvious remedy given the impossibility of regulating the money supply to stabilize Bitcoin-denominated prices,” reads a section of the report, entitled Bitcoins and Banks: Problematic currency, interesting payment system.
Bitcoin’s prime advantages over banks are its lack of transaction fees and middle-men (disintermediation). But given Bitcoin’s “limited viability as a currency,” UBS concluded that it poses limited threats to banks.
Still, the research team led by UBS analyst Derek De Vries concludes that existing money managers could “absorb the benefits” of Bitcoin. The report describes Bitcoin’s distributed block chain as a technological innovation that could be applied to fiat currencies, like the U.S. dollar or the euro.
“Setting aside its political agenda, we see Bitcoin as having some potential as a new transaction technology, where a Bitcoin-like technology could provide a basis for a new shared payments and transfer system using existing currencies and securities. Such a system could reduce systemic costs, and provide faster, secure, transfers — particularly in the international arena.
“However, given the status quo and the lack of any clear incentive for developing such a network, we do not see banks developing this any time soon.”
While statements from the banking industry are mixed, no major bank is backing Bitcoin, the report notes. But there are some Bitcoin-related opportunities for banks in the form of investment services for clients, similar to the Winklevoss Bitcoin Trust, the UBS research team added.
“In our view, Bitcoin, while innovative, fails to fulfill most banking needs better than the current alternatives. As we see it, Bitcoin’s only realistic prospect in the long term is as a money transfer system.”
At the time of publication, one Bitcoin is worth $504 — down from $1,000 around four months ago.