Does Digital Currency Pose a Threat to the Banking System?

By Daniel Matthews

For anyone watching Apple’s ever-expanding role in the world of tech, it’s been an interesting year to say the least. And it just got more interesting. Apple is making Australian banks look petulant. Or, depending on how you look at it, the banks are making Apple look monopolistic.

A “bloc” of Australian banks is petitioning the Australian Competition and Consumer Commission (ACCC) to make Apple give them the secret to Apple Pay and NFC technology, the Register, a U.K. newspaper, reported last week. 

NFC technology is near field communication, a type of RFID (radio frequency identification) that allows your cell phone to communicate with a credit card reader. Samsung, Walmart and Android have all patented their own contactless payment technology using NFC. So, why are the banks picking on Apple? Why can’t they hire someone to create their own contactless payment app? There’s something about Apple and its product that these banks view as a threat.

Apple already sparred with the FBI in a case that seemed a lot more serious. Short synopsis: The FBI viewed Apple’s encryption as threat to security, because it protects killers' information, such as that of San Bernardino shooter Syed Rizwan Farook. Apple fought back, saying a backdoor to the iPhone equals a threat to consumer privacy. The FBI found a third-party hacker and dropped the case.

There’s a trend here. Stakeholders want to crack into Apple’s technology and use the law (whether that law is an outdated All Writs Act or Australian Competition Law as referenced above) as their reason for access. But Apple has the power of the consumer -- and the presumed protection of consumer privacy — on its side. The ACCC’s decision will see what type of pull Apple’s power has in Australia.

Apple is using the potential threat to privacy and security as one of the reasons for rejecting the banks. If the banks get their hands on Apple’s NFC antenna, essentially piggy-backing off Apple Pay, they’ll be able to access information people have given to Apple.

Credit card companies would be able to collect the fees Apple collects with each use of Apple Pay, and banks work hand-in-hand with creditors. Apple feels it has the right to the fees — it patented the app, and the app is integrated with the technology. Apple says the banks want to form a ‘cartel’ to give unfair advantage to the credit card companies.

From the banks’ perspective, NFC is simply a type of technology. The people using Apple Pay NFC, they say, wouldn’t be able to use it without banks. In their logic, if people are going to use Apple Pay to access funds banks are holding, then banks deserve to profit from the use of the technology, not Apple. In this scenario, Apple becomes a mere go-between connecting consumers and banks.

The problem with this argument is that Apple doesn’t have the patent on NFC. Apple isn’t saying the banks can’t develop their own NFC-based apps. The banks just can’t call their app ‘Apple Pay,’ and they can’t take advantage of an app that already has that name. The banks are confusing Apple’s app, which allows people to use NFC technology, with NFC technology itself.        

This case represents the growing potential for disruption of the banking system by digital currency.

On the blockchain and bitcoin side of the, uh, coin, digital currency has taught us that there’s an alternative to the centrally-managed banking system. If a peer-to-peer network with the right technology holds the keys to payments, in theory we don’t need banks.

Check out the infographic below for a crash-course in digital currency:

The technology that enables bitcoin is Application-Specific Integrated Circuits (ASIC). This hardware allows bitcoin miners to participate in the blockchain. Like NFC, blockchain is something anyone can use with the right hardware.

The stage is set for banks. Just like with Apple Pay, with bitcoin and blockchain, you’re either in or you’re out. Plenty of banks have already decided they’re in on Apple Pay and NFC. But NFC is merely a different way of using the centralized system. Apple isn’t disrupting that system, just nudging it to include an unorthodox player. Bitcoin cryptocurrency, on the other hand, could disrupt the system.   

Cryptocurrency’s value is speculative, based on factors such as how many people use it to replenish their wallet, issue salaries, or pay merchants. A Miami judge ruled that a man couldn’t have committed a crime with bitcoin, because it’s not real money.

Where does this leave banks that are starting to take cryptocurrency seriously? There’s still the matter of value. People are ascribing value to cryptocurrencies. The blockchain is more secure than centralized banking, and security increases perceived value. Banks will want in on that value.

But when banks decide they’re in on bitcoin — when they store it and centralize its exchange — bitcoin becomes vulnerable. That’s what happened with Bitfinex. The Hong Kong bitcoin bank got hacked to the tune of $77 million. Bitcoin’s value has since gone down. But it will go back up again as people continue to use it outside of any sort of hackable banking system.

This presents a paradox for banks. They have to use bitcoin on the blockchain, not cached in a system. But using bitcoin on the blockchain — coming to cryptocurrency on its terms — undermines the centralized system on which banks rely. For one, it removes backup by the Federal Reserve Bank, which sets interest rates and insures funds against theft and borrower default.

Compared to bitcoin, Apple Pay and other NFC applications present a relatively minor threat to banks. As the dispute in Australia demonstrates, Apple threatens the primacy of credit card companies more than banks. Chipping away at credit card processing fees is one thing. Decentralizing the system is another.

Still, I don’t think we should underestimate what the Apple Pay dispute represents. The Australian banks, like the FBI before them, are sniffing out a power shift -- and they don’t like it. Whoever holds the keys to ubiquitous technology, effective in each compartment of our lives, holds a level of power over the institutions that used to be only game in town.  

Image credit: Flickr/iphonedigital

Featured image: Federal Reserve Bank of Chicago, courtesy of Tony The Tiger/Wikimedia

Infographic courtesy of Northeastern University's Online Master of Finance Program, used with permission

Daniel Matthews is a freelance writer specializing in business, tech, and travel at the intersection of ethics and sustainability. You can find him on Twitter.