A Brief History of Bitcoin and Banking (Part 2)
…continued from Part 1.
Trough of (Banking) Sorrows
As the crypto industry finishes the tail end of the “post-Gox” stage, things are relatively quiet. Less drama surfaces than during the previous few years, but it’s still extraordinarily difficult to get banking traction.
It’s difficult to imagine for all the new guys who entered crypto in recent years, but during this era Bitcoin was so radioactive that you’d get kicked out of a TradFi’s office in short order if you even mentioned the B word.
Many banks were unwilling to even work with you on “operating accounts.” These are just typical corporate accounts designed to accept venture investments, pay out salaries, expenses, and rent. The fear of crypto that was endemic within US banking persisted for so long that at LedgerX, we were in danger of not being able to pay salaries with a normal check if a bank got nervous and closed our account.
An executive darkly suggested that we get our VC investments in bearer bonds, store them in our office, and hand that out in lieu of the normal direct deposit for payroll. Fortunately this wasn’t necessary as we secured two long-term operating accounts, but in retrospect that would have made for a funny story.
So here I have to think some folks might suggest, why not just pay people in crypto? Isn’t circumventing old TradFi problems like this the raison d’être of Bitcoin? But this wasn’t a popular idea at all among most of my team circa 2014.
In retrospect they would all be rich if they had elected for that payment option. I used to give new executive assistants 1 BTC to welcome them to the company and to explore crypto with (a tradition I copied from Brian).
One individual forgot about it and many years later texted me when she realized it was now worth a BMW. One thing about the crypto space is there’s never a dearth of entertaining stories.
“Competitors” to the Rescue
Operating accounts in place, by late 2014 / early 2015 the conversations I had with other exchange CEOs always revolved around strategies for securing a durable custody account for LedgerX’s customers.
A custody banking setup is a different beast all together from the run of the mill TradFi operating account. It’s a legally different entity that holds monies of behalf of clients and requires special segregation protections. If you are a regulated exchange like us, the banks also had to sign a separate form provided by the government. Lawyers got really rich finalizing these docs.
In addition to being incredibly hard to get, they’re a nightmare in cost and time to maintain, compliance wise. Why? Well, for reasons that FTX’s customers will now tragically appreciate.
This isn’t DeFi crime, this is classic TradFi crime. We saw it in the .com bubble as well.
Prosecutors said Mr. Kozlowski had misappropriated more than $270 million in loans, including $12 million that he used to pay for his personal art collection. Prosecutors said he had borrowed $9 million to buy Boca Raton real estate and borrowed $7 million to buy an apartment for his wife as part of a divorce settlement.
Prosecutors also said Mr. Swartz had used $72 million of Tyco loans, which were intended to cover tax payments, to pay for an assortment of personal investments, business ventures, real estate holdings and trusts. The suit also contends that he used $9 million in relocation loans to buy a yacht and invest in real estate. All of the loans were later forgiven by the company, under the direction of Mr. Kozlowski, prosecutors said.
That’s why the FTX criminal empire was brilliant to use Alameda’s relatively normal asset management bank account as a de-facto customer custody account. In doing so, they skipped all of the custody safeguards, oversight, and compliance hassles and were off to the races.
In the end, we were extremely fortunate to get assistance from an unlikely source — the far-sighted CEO of one of the largest names in this space. He generously helped me with introductions to a precious few open-minded bankers who kept an extremely low profile (they knew they would be swamped if the community knew they were open for business).
So why did he do that?
“We don’t want to be the tallest tree in the forest.”
Fair enough.
PR Presses the Point
There is an interesting twist that ironically will get banks back into the crypto (as an asset class, not a technology) game. A new theme emerges that is devised by ambitious entrepreneurs looking for the next hot area without all the baggage of BTC’s scandals: “blockchain not bitcoin.”
This period sees a lot of TradFi executives creating high profile blockchain companies. They set their PR machine into overdrive, educating countless executives on Wall Street. And while this universal faith in blockchain technology solving all problem does not quite pan out, it does have the effect of forcing senior bank executives to educate themselves deeply on the subject.
Coincidental to this period is an incredibly steep and rapid rise of prices of this novel asset class. Banks, despite their reservations of crypto’s inherent value, will always cater to customer demands. And customers, including large and well established asset managers, wanted to buy crypto now. And now they know quite a bit about this
Banks oblige.
New to trading? Try crypto trading bots or copy trading on best crypto exchanges
