A Brief History of Bitcoin and Banking (Part 1)
Here are a few thoughts of mine on some of the recent developments within the banking system vis a vis crypto companies.
Let me clarify that this has nothing to do with banks “pulling out investments” in Bitcoin, but rather the far more severe consequences of them not working with crypto companies for traditional banking services.
First, a brief history of Bitcoin and Banking.
From Nothing to Something
In the beginning, Satoshi mined the Genesis block, bringing into existence the very first 50 BTC (I know, I know…this reads almost like the book of Genesis [1:1]). No fiat or banks were needed at this stage, since no matter how much cash you had, the only way to obtain crypto was by mining it.
Mining and Meeting
Later, when enough amateurs downloaded the software and minted more and more coins that found themselves in the wallets of larger numbers of people, Satoshi Squares popped up. BTC was still so cheap you could bring cash to a physical location and watch as someone transferred their mined coins to your address.
Still, at this point, the banking system is largely out of the crypto picture.
Ignorance is Bliss in Bitcoin
As mining became more centralized and people became tired of waiting in cold weather at parks in NYC to exchange USD cash for a UTXO to clear, electronic exchanges became the obvious next evolution. This is where the banking system’s role really comes to fore.
At this stage (we are talking roughly the 2010–2013 era) the relationship between banks (TradFi, although I hate this term) and crypto (MtGox, Coinbase, and others) can be described as one of ignorance and confusion. No one, and I mean no one, in a position of any seniority at a bank knew what the heck this crypto stuff was back then. When I needed personal trade approvals from Goldman Sachs in 2011, my request to buy BTC went up 4 compliance levels before they finally said, nobody knows what this is so just go ahead and do it.
So at this point in time, the crypto industry is relatively minuscule, and the banking system is largely open for business. From a bank’s perspective, why not offer their USD services? These are just another bunch of Silicon Valley geeks who need a bank account. What could go wrong…
Making Mountains out of a Molehill
In February 2014, MtGox implodes. Hundreds of millions of dollars of customer funds were lost (today, FTX makes this look like peanuts, but this was a lot back then). This situation, and the ensuing liability and morass of endless bankruptcy proceedings are the worst nightmare for a bank. It simply isn’t worth the hassle for them.
This changes the landscape for crypto exchanges dramatically.
First, for all newcomers looking to work with a bank, business is closed. Period. No bank wants to work with the next Magic the Gathering Online Exchange (the original MtGox service) turned crypto “fake money” exchange turned bankrupt custodian of BTC and dollars for irate retail investors.
Second, this creates a vacuum that hugely favors the then incumbents. The perceived responsible players in the exchange space are essentially grandfathered in if they had a prior banking relationship pre MtGox.
This leads to a consolidation / concentration of liquidity for a handful of US players. International players also emerged which gained market share by purposely / exclusively working with overseas banks in jurisdictions known for lax enforcement.
It cannot be understated how crucial banking support for crypto is to the overall health of the ecosystem. I haven’t been to a satoshi square in awhile, but I doubt if I showed up to one today I could buy $1 billion worth of crypto with cash very easily. You can only do it via a bank.
This is why these recent articles worry me so much. It’s the absolute critical on ramp for bringing in the next wave of fiat investment to boost the price of BTC and other crypto offshoots.
From 2014 on, the next few years are difficult ones for new entrants to gain a durable banking relationship. Difficult, but not impossible. A few stories will be useful to illustrate how treacherous this environment was like.
Which will be coming soon in Part 2…
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