A recent report from BTIG highlights the fascinating issues that crop up when upstart cryptocurrency Bitcoin interacts with the rest of the world as it moves to center stage. Some have speculated that Bitcoin could move into the space traditionally occupied by Western Union. BTIG explores the issue in their report:
As digital currency Bitcoin captured headlines in late November after the value of a single bitcoin rose to above $1,000 – it subsequently reached a record of $1,238 on December 4 – one of the angles the media seized upon was the notion that it posed a serious threat to traditional money-transfer platforms such as that of buy-rated Western Union (WU).
Bitcoin narrative helped push down WU
While there were plenty of reasons why WU shares swooned during the last couple of months of 2013 – the company’s surprising announcement that it would experience a 40%-80% increase in compliance costs being at the top of the list – we think one of the elements weighing on the stock was the Bitcoin-displacing-WU narrative. Those pushing this storyline argued that it would be much less expensive to transfer money using bitcoins than to pay about $8 to move $100 through WU, and that this differential would doom the company.
We appreciate why the Bitcoin story would be compelling to some – particularly those prone to be attracted to shiny objects – but for several reasons we very much doubt that the digital currency will seriously threaten WU any time soon. Insofar as the stock’s recent weakness was attributable to the ballyhoo about Bitcoin, we think such selling was simply unwarranted. And as WU has not rebounded significantly from its late-2013.
We are not arguing that the money-transfer space is immune to technological disruption. WU has acknowledged the need to adapt to changes in technology – “Western Union proactively leverages macro trends to help shape our approach to product and service development,” a WU spokesman said last month – and it has been investing heavily in its digital offerings. Digital, which currently represents approximately 5% of WU’s revenues, has become the company’s fastest-growing segment.
And let’s put aside for now the fact that Bitcoin is accepted by very few businesses such that in most cases it would need to be converted into traditional currency to be used. While we believe most of the businesses that have announced they would accept bitcoins – Overstock.com, Zynga, and Richard Branson’s space travel outlet Virgin Galactic, among others – did so primarily for the free media attention their adoption of the currency would bring, we acknowledge the possibility that bitcoins could be accepted by a more significant number of businesses in the future. (Of course, like the businesses that currently accept bitcoins, those firms would need to severely limit their exposure to its extreme volatility.)
Our doubts about Bitcoin’s ability to make any kind of dent in WU come more from a practical standpoint. One of the characteristics of Bitcoin that make it attractive to its proponents is that transfer of the currency is not regulated. Given the lack of central control, the government can’t stop you from giving out bitcoins.
However, as the People’s Bank of China (PBOC) demonstrated last month when it restricted merchants from accepting bitcoins (China’s top search engine, Baidu, and its top e-commerce website, Alibaba, now refuse to use them) and decreed that banks and payment processors could not convert the digital currency into yuan, the conversion of bitcoins into other currencies is subject to regulation. (The PBOC’s action was not unprecedented, as in 2003 the Chinese internet company Tencent created a virtual currency called Q Coin for use in games. After Q Coin began trading on exchanges and its value increased significantly [15-20% per annum], the Chinese government in 2010 banned exchanging it for the yuan and its value in the real world went to zero.)
Financial institutions, governments stress Bitcoin risk
Indeed, while many users of bitcoins appreciate the anonymity afforded by the world’s first completely decentralized digital currency, it has also attracted the attention of regulators concerned that the digital currency could enable tax evasion, money laundering and trade in illicit goods. Moreover, several recent high-profile thefts of bitcoins – hackers stole the contents of 4,000 customers’ digital wallets on Czech exchange Bitcash.cz, while more than 4,000 bitcoins were stolen from an Australian Bitcoin bank – pointed to the need for consumer protection.
That need was underscored on Tuesday when The Financial Times reported that Germany’s Bundesbank had warned about the risks of Bitcoin “amid rising concerns from regulatory authorities around the world.”
“There is no state guarantee for Bitcoins and investors could lose all their money,” said Carl-Ludwig Thiele, a board member of Germany’s central bank, told Handelsblatt. “The