Bitcoin Isn’t the Biggest Threat to Banks…

Ukraine isn’t at the top of my ‘places to see’ list.

Poverty, violent protests and pro-Russian rebels roaming the streets is not my idea of a fun-filled holiday.

But changes are taking place.

Ukraine has an upcoming election in 2019. The country is working on ridding itself of corruption in their legal system. They even took down a statue of Lenin, which was still overlooking downtown Kyiv.

In its place is a new statue. If you point your smartphone at the spot you’ll see a hologram of Ukraine’s future. It’s a statue of Satoshi Nakamoto, the inventor of bitcoin.

Why Ukraine loves bitcoin

Ukraine’s love of bitcoin was a combination of necessity and opportunity.

The opportunity came in 2014. Revolutionaries toppled the government. A year later, Ukraine’s hryvnia collapsed to a record low.

US firms in Silicon Valley saw this as a massive opportunity. Ukraine had lots of engineers willing to work for cheap. The rent is also much better than anywhere in San Francisco.

Why not shift some tasks over to Ukraine?

And that’s exactly what happened. According to Bloomberg Businessweek, Silicon Valley had about 100,000 Ukrainian engineers working remotely, and thousands more freelancers. Many of whom received US dollars as payment.

Now, what do you do as a Ukrainian engineer? Are you going to trade a stable currency (dollars) that’s not accepted in your home country for a depreciating one (hryvnia) which you can use?

This is where necessity came in. Instead of holding a declining currency, engineers traded their US dollars for bitcoin.

Businessweek writes:

You couldn’t design a more ideal environment for the rise of blockchain-based digital currencies if you tried.

In Ukraine, where the average monthly salary is about $300, there are 25 crypto coins, with $1.9 million in daily trading. Hundreds of brick-and-mortar businesses accept various bitcoin imitators.

One rural mayor recently bought the blockchain company Cardano’s Ada coin for his constituents. One vendor in Kyiv’s central farmers markets takes payment in 11 cryptocurrencies. Porsches, Lamborghinis, and Bentleys — playthings previously accessible only to an oligarch — can be seen around Kyiv driven by the crypto rich.

I’d imagine bankers in Ukraine aren’t exactly optimistic about their future. Ukraine is in dire need of stimulus. But how do you pump money into a system that doesn’t want your currency?

OK, so if this is happening in Ukraine, why isn’t it also happening here in Australia? How come we’re not all ditching Aussie dollars for bitcoin?

It should be obvious that Ukraine is a unique situation.

The reason we don’t use bitcoin as a form of payment is because the Australian dollar works much, much better.

OK, so maybe there are some negatives that come with using central bank-created money. But it’s got an important feature bitcoin doesn’t: stability. Unlike the Ukrainian hryvnia, the Aussie dollar is more stable than bitcoin. To plan for the future, savers and investors need to work with a stable currency.

That’s why, in its present form, I don’t think bitcoin is the biggest threat to banks. Instead they should be far more worried about two tech giants growing in the East.

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The real threat to banks…

Bank tellers in China are afraid of digital change. But that’s got nothing to do with bitcoin. What keeps most of them up at night is a small device in their pocket: their smartphone.

To say China is a smartphone society is an understatement. It’s become an extension of our Chinese brethren’s lives. It houses all their information, all of their entertainment, their bridge to friends, family, and now even loans.

On most Chinese smartphones is a very important app. Maybe you’ve heard its name before. It’s called WeChat. It’s sometimes referred to as the Facebook, Inc. [NASDAQ:FB] of China.

Such a comparison is a bit misleading though. WeChat is more than just a social network. It’s a hub, where Chinese users do anything and everything.

It’s a place where you can book doctors’ appointments. Bond traders take orders from their WeChat accounts. Users can even use WeChat as a mobile wallet, payment system or bank.

In a society where mobile phone subscriptions outnumber the population, it makes sense why banks might be a little nervous. WeChat users can do everything on their mobile that a brick-and-mortar bank offers.

Businessweek continues:

China’s fintech landscape is ruled not by the incumbent lenders, but by Ant Financial Services Group, an affiliate of Alibaba Group Holdings Ltd., and Tencent Holdings Ltd., best known for WeChat, its messaging and social media network, and WeChat Pay.

Ant and Tencent, with the stranglehold over the mobile payments market, are siphoning deposits and feeds from traditional banks by offering online money-market funds and other financial products.

Both run profitable banking units started in 2015 that have signed up tens of millions of customers without having any physical branches. None of this has been lost on Chinese officialdom. The government is starting to put limits on the financial services, such as credit scoring and some types of lending, that these newer players can offer.

I would argue this is an inevitable move. Either the banks are going to get help from companies like Tencent and Alibaba, or consumers are going to vote with their dollars and move online.

The reason I bring this up is because you can actually invest in both Alibaba, which trades on the New York Stock Exchange, and Tencent, which trades on the Hong Kong Stock Exchange, right now.

Because of recent events, stocks are declining globally. Getting the worst of it are Chinese tech stocks, namely Alibaba and Tencent.

From their highs this year, Alibaba is down more than 30% and Tencent has fallen more than 40%. Sure, these stocks could fall further. But surely they’re worth considering as investments.

Buying both would not only represent buying more than 90% of China’s trillion-dollar mobile payments market. You might also be buying into the future of banking.

Your friend,

Harje Ronngard,
Editor, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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