Who do you trust more? Banks, or digital assets built on distributed ledgers?
It’s a timely question for some in the cryptocurrency community as Tether, the most widely used US dollar tied “stable coin” in cryptocurrency trading, received a court order from the New York Attorney General surrounding its investigation into a potential $850 million fraud.
With the Tether problems, it’s clear that cryptocurrencies can suffer from a lack of trust and oversight (though many in the crypto world wouldn’t consider Tether a true cryptocurrency given its nature as a fiat-backed asset).
But these problems aren’t unique to cryptocurrencies. The banking system itself suffers from a lack of trust…
A 2015 survey by PWC showed us that millennials in the US would rather see a dentist than walk into a bank, and the 2008 financial crisis demonstrated that even the biggest banks aren’t “too big to fail.”
The 2008 global financial crisis was caused by derivatives created around fraudulent mortgage-backed securities which were bought and sold by many of the worlds largest banks.
By the way… the derivatives market is expanding again, rapidly, and has estimated by some to have grown to now be nearly 10X the size of global GDP. (2018 global GDP was estimated to be $80 trillion (WEF), and derivatives estimated to be nearly $700 trillion (BIS).)
Tim Draper, notable venture Capitalist and early and significant Bitcoin investor was interviewed for this article and stated that, “I don’t know anyone under 35 years old who really trusts the banks. This is the banks finally hitting the “acceptance” phase of grief. They have dismissed crypto, aligned against it, complained about it, fought it..”
Draper went on to say, “I think the traditional [banking] world should catch up and adapt to the cryptocurrency world. Regulators need to rethink 80-year old regulations that made sense for that time, but no longer, and give a path for innovators to innovate, and allow this new generation to develop its new, global economy.
Long term, I hope to be able to raise a fund only in bitcoin, invest in startups with bitcoin, and have them pay their employees and suppliers in bitcoin. That way my accounting, tax and auditing would all be done automatically on the blockchain. I would also hope that my relationship with my LP investors would be on a smart contract, where our distributions would flow to all the right wallets automatically, so as not requiring the work of transfer agents, lawyers, and accountants to just distribute gains.”
Creating Trust With Banks & Financial Institutions for Crypto
Part of the allure of Bitcoin and other decentralized digital currencies centers around operating on “trustless” blockchain-based systems, available for anyone to join, verify, transact, watch and audit.
However, the larger growth of Bitcoin and the overall cryptocurrency ecosystem seems fairly dependent on building new systems that better connect the cryptocurrency ecosystem to the traditional banking system. This will bring more fiat currency dollars and value into the cryptocurrency ecosystem via fiat “on-ramps”, opening the floodgates to potentially on-board millions of new crypto holders and users over the next few years.
To facilitate this, new policies are needed to drive bigger on-ramps, along with new banks and non-bank financial institutions who can hold, access, and transact from fiat currency in bank accounts to digital currencies, and back again, in a safe and regulated way.
Spencer Bogart of Blockchain Capital recently outlined in his post The Biggest Crypto On-Ramps Ever how the large messaging networks of today, including Facebook and Telegram, may actually be the largest initial drivers of the next wave of crypto adoption through their existing reach. But to do this, and to make it feasible at scale for their existing users, these networks likely need real solutions to the fiat on-ramps problem that faces many companies building in the crypto ecosystem today.
For this next wave of broader adoption to happen, these large networks will need new digital currency friendly banks and financial partners to facilitate these on-ramps. Or they’ll need to find ways to build these new crypto friendly solutions for themselves. Either way, it will be a boon for the digital currency ecosystem.
But today, we’re still at the very beginning as many crypto companies still can’t open a bank account as existing banks shun them, even for basic payroll services.
What’s more… I’d also argue that if Bitfinex / Tether had better options available in working with more trusted banks or custodians who provided real oversight and required the appropriate AML and KYC processes, they would likely have avoided many of the issues surrounding the missing or confiscated Tether reserve funds (as it has been reported).
Crypto Banks of the Future
The fiat on-ramp opportunity in crypto is small today, as compared to larger financial markets. But as the crypto ecosystem grows, and as blockchain begins to be integrated and put to use within some of the existing banking & payments systems, a larger opportunity will expand beyond the crypto on-ramp use case which will be truly massive and global in scope.
I recently wrote about this global opportunity and the battle that’s shaping up around it over the future of money in The War For Money: Banks vs The Crypto Community.
Existing banks have continued a general ban on cryptocurrencies, taking a defensive stance to keep cryptocurrencies from expanding further, while seeking to build a moat around themselves by not banking cryptocurrencies.
This has made it more difficult for early innovators looking to bridge fiat and cryptocurrencies to find trusted bank/custody partners. But large banking players like JP Morgan appear to be waking up to the opportunity to do some of this themselves, given the JP Morgan announcement of JPM Coin. However, a new generation of dedicated blockchain and digital currency enabled banks and fintechs are looking to seize some of the adjacent opportunities in the market before the big banks get there.
As this market shapes up, it’s important to note that the US has yet to issue clear policies surrounding cryptocurrency, its classification, and its usage within the larger regulated banking & payments system.
This has become a potential advantage to other digital asset friendly jurisdictions who have already passed new laws. Countries like Bermuda, Singapore, Malta, and others have already passed new banking and digital asset laws, positioning themselves to become new global hubs for innovation in the space.
I recently hosted a private summit in Bermuda, the B3 Future Banking Summit, aimed at bringing together the people, policy makers, investors, and ventures who are working to further the use of blockchain and digital currencies within the existing banking & payments system.
Coming out of the summit, it was clear that a next generation of fintechs, banks, and financial services companies are in development in the US and globally, but a complex web of differing laws across jurisdictions exist that spell both an opportunity and a challenge.
It’s my belief that these companies represent more than just a commercial opportunity to grow significant businesses early on as new laws take hold in more trusted and regulated jurisdictions.
I also believe these companies have the potential to bring positive impact to our financial systems, over long term, by helping to create more open and inclusive set of financial services available everyone – from institutions to the under-banked.
Please share or comment with your thoughts and perspective.
- Disclosure: I’m involved in banking & payments related ventures on distributed ledger and run a fund that invests in digital currencies. Follow me on Twitter at @chancebar and get in touch with me at ChanceBarnett.com