How scared are banks of bitcoin AND what will they do about it?

How scared are banks of bitcoin
AND
what will they do about it?

 

Whether we consciously think about it or not, banks are intertwined with our lives. We need them, but more importantly, they need us. It’s something to consider, given that there are times the banking industry can sometimes be frustrating, to say the least. Although startups like Simple are trying to bring a friendlier face to banks, it is the underlying system itself that is resistant to change. When faced with the emergence of something like bitcoin, it is worthwhile paying attention to how the banking industry behaves. Many who are working towards building a bitcoin economy believe that banks will need to change.

Risk versus reward

Banks by their nature are always looking to reduce their exposure to risk while balancing out profits from making loans as well as investments on their clients’ behalf. As it stands right now, bitcoin must seem infinitesimal compared to a bank's regular business operations that it is probably not worth contemplation.

Gareth MacLeod, who is a co-founder of Canada-based Tinkercoin, has been able to convince a bank to do business with his company.

“Banks are conservative institutions”, MacLeod says. “From their perspective, they stand to gain very little from working with bitcoin businesses, and stand to lose a lot. Even the largest bitcoin businesses would represent only a few hundreds of thousands of dollars of revenue to a bank, which is pennies to them.”

Global credit card fraud is on the rise. For payment processors, bitcoin could just complicate things. Tinkercoin has experienced rejection by a major credit card company, which is not surprising given that fraud protection is a standard accouterment to possessing plastic. “Their potential losses are in the tens of millions if the business is subject to fraud, or the business runs afoul of the regulators.” MacLeod’s experience with banks and financial companies gives an outsider some perspective on the challenges working hand in hand with the savings & trust down the street.

The onus is on bitcoin companies

The case for bitcoin may be that the companies building bitcoin businesses will simply have to find ways to comply with financial regulations before regularly interfacing with banks. Coinsetter, a bitcoin-based trading platform that bears more resemblance to currency trading than that of Mt. Gox, is geared towards that view. The CEO of Coinsetter, Jaron Lukasiewicz, has had numerous conversations with banks and is certain that the path forward is complete compliance from the start.

Coinsetter’s trading platform, still in beta, allows for investment strategies like margin trading.

“Bitcoin companies, especially exchanges, can succeed by creating strong AML programs before entering into discussions with banks”, says Lukasiewicz. “The more they can guarantee that bitcoins aren’t being sent to bad places, the better.”

In terms of entrepreneurship, this is a vastly different strategy to employ when compared to a regular startup. As anyone who has started a business or worked in a bootstrapped entity, it’s all about doing whatever it takes to get off the ground. With bitcoin, it’s going to be different: if you don’t have the right rules in place from the beginning, there is a risk that you will get shut out of the system and possibly fail.

A guaranteed market

Again, a bank’s propensity to do business with a particular person or entity comes down to risk. It may be that a maker will need to guarantee a market for bitcoins. Remember when Mt. Gox couldn’t handle the trading on its own platform and had to shut down for 12 hours? Banks do not want something like that to happen. Ever.

On April 11, 2013, Mt. Gox suspended trading on its exchange for 12 hours. Banks do not want something like this to occur. John Paul Engel, who runs the boutique management consulting firm Knowledge Capital, believes that a big player in finance is going to have to get involved in decentralized currencies. Only then will bitcoin become legitimized in the eyes of credit card companies, payment processors, and the local thrift. A respected market maker would have to step up and guarantee a market in bitcoins.

Engel believes some institutions will need to “effectively provide a bid (buy) and an ask (sell) spread on a constant basis. The organization would need to have the credibility and the resources to guarantee it. Someone like a Goldman Sachs or Berkshire Hathaway. Someone with deep enough pockets to ensure the float.” Goldman Sachs being a bitcoin market maker? It sounds like something from fiction, but it’s probably closer to reality than ever before.

Banks have two choices

Banking innovation in financial services as a result of bitcoin is likely to take some time. The process that the banking industry goes through to enact any sort of change is slow and calculated. It all goes back to that risk versus reward proposition. Financial institutions have little incentive to “fail fast”, a common method of moving forward in an entrepreneurial or startup scenario. It's what bitcoin startups would prefer to go through in order to develop products and services, but is not realistic.

Many banks are fearful that the sector is about to go through wrenching change. At this point, it appears that banking may have reached a fork in the road. They likely have two choices. Institutions could begin to work within the new, continuously evolving framework of digital money. That would require them to start by recognizing that there is a shift in financial technology and embrace that movement.

Or, they could put a friendly face on an old system. That would be the route that is being put forth with products like Simple. This is whereby a contemporary type of interface masks the traditional, antiquated banking system that is running in the background. We’ll probably end up seeing different banks choosing different routes depending on their attitude of disruptive tech like bitcoin. What do you think about banks working with bitcoin companies? Is it fair that banks don’t want to do bitcoin-based business? What do you expect banks to do when faced with the proposition of decentralized virtual currencies?

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

Hard Fork Will Slow Bitcoin Price Down

Hard Fork Will Slow Bitcoin Price Down

  

With the ETF decision out of the way, the focus in the Bitcoin community has turned back to the scaling debate. While some proponents of an increase in block size are in favor of a hard fork, South African Bitcoin entrepreneur Vinny Lingham feels that this would negatively impact Bitcoin.

Scaling arguments

The Bitcoin network seems to be choking at the moment, with unconfirmed transactions piling up, transaction fees shooting through the roof and a general sluggishness across the network. Microtransactions have more or less ended, with high transactions fees making them unviable. Everybody agrees that there is a problem but unfortunately, consensus eludes the Bitcoin community on what the solution should be. The Core team believes that retaining block size at 1 MB is crucial to maintaining the distributed nature of the Bitcoin network, while others advocate increasing the block size to increase the network capacity.

Bitcoin Unlimited

Bitcoin Unlimited (BTU), which seeks to transfer power to decide on the block size to the miners, has emerged as a frontrunner to handle this problem. The proportion of nodes who have “signaled support” to Bitcoin Unlimited has increased steadily to over 30 percent. It has overtaken SegWit, currently backed by the Bitcoin Core team, which has 28 percent of nodes supporting it.

The increasing support for Bitcoin Unlimited has had some unintended consequences, with a bug in the software (since rectified) resulting in a number of codes crashing and doomsday scenarios being predicted if Bitcoin Unlimited becomes successful. Once the number of miners signaling support for Bitcoin Unlimited crosses 50 percent, it is possible for a miner to generate a block size greater than 1 MB, thereby forking Bitcoin.

Why is Vinny Lingham against a hard fork?

Vinny Lingham believes that Bitcoin has the potential to reach $3000, only if there is no hard fork.

“Danger on the horizon. If Bitcoin forks, all bets are off and we can kiss $3k BTC in 2017 goodbye…”

Vinny believes that Bitcoin’s greatest asset is its brand awareness, which will get diluted if there is a hard fork. It could lead to confusion for the common man of which Bitcoin is the real one. Merchants might avoid both BTC and BTU because of the confusion. It could also result in rival factions dumping both versions of Bitcoin at exchanges, thereby depressing the price.

Vinny points out to what happened to Ethereum Classic when the Ethereum Foundation sold off their coins. Moreover, the network effect would decrease with users divided between BTC and BTU, thereby lowering the overall value of Bitcoins in circulation. While the block size debate has sharply polarized the Bitcoin community, working together would be the only way to ensure that Bitcoin’s value is not destroyed.

Bitcoin Price Shrugs Off Bitcoin

 

Bitcoin’s price remained stable as news surfaced of a bug in Bitcoin Unlimited (BU) shutting down half of its nodes. On Tuesday, BU’s node numbers dropped suddenly from around 800 to 400, with developer Andrew Stone and investor Roger Ver subsequently confirming that an attacker exploited a bug in the protocol.

 

Stone wrote on Tuesday:

“We are seeing an abnormal, hard-to-create input result in a negative outcome so we are classifying this as a network attack.”

The events unleashed a frenzy of social media activity which even engulfed some of cryptocurrency’s best-known names. Core developer Peter Todd took to Twitter to deny any involvement in the bug, about which he tweeted an hour after the malicious episode began. Responding to Todd, tech blogger Avatar X alleged that fellow developer Greg Maxwell had said that two further bugs were present in BU which had “yet to be fixed.” Meanwhile, received hostility. One BU node operator accused him and other responsible parties of “plain incompetence” as panic gripped a community to whom Ver had only last week unveiled a brand new mining pool.

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

Someone Wants to Stick a Fork in Bitcoin

Someone Wants to Stick a Fork in Bitcoin

 

Which bitcoin will prevail?

A dispute among the people involved in bitcoin is revealing a paradox of the digital currency: The same resistance to human meddling that drove its popularity may also be its greatest limitation. It seems that the only way to get anything done is to split the currency in two.

At issue is the size of blocks, the batches in which transactions are processed and that make up the links in the so-called bitcoin blockchain. Currently, they’re so small that the whole system can handle only about seven transactions per second — nowhere near enough to compete with, say, Visa network’s 24,000 transactions per second. Some people think that’s a good thing! Bitcoin relies on thousands of internet-connected volunteers, and their operating costs should be kept as low as possible.

On the other hand, many are unsatisfied with the system’s speed. A faction known as Bitcoin Unlimited has released a new version of the software that can create bigger blocks and is now rallying the support of bitcoin miners, who process transactions in return for new currency. The plan is to gain enough minor support to build its own branch-off the chain. Meanwhile, the computer geeks who develop the core bitcoin software have offered their own solution, which not only increases capacity but also enables the creation of low-value payment channels adjacent to the main network — the idea being that people might not need every coffee purchase immortalized on a globally distributed ledger.

Bitcoin and the Blockchain

The standoff illustrates a vulnerability. Because bitcoin relies on a worldwide network of individual computers to maintain the blockchain, one group can — intentionally or not — become separated from the rest. The two networks will thus accumulate different information, creating competing chains. If the “fork” is unintentional, the networks eventually reconnect and discard the lesser chain. But if the fork is intentional, as in the case of Bitcoin Unlimited, it can continue forever.

The insurgents’ software will eventually disconnect from anyone who doesn’t support their blockchain. The most troublesome part is that both sides want to assume the identity of bitcoin. This would be like the Confederate states seceding from the Union, then insisting that they were the real United States and that the northern states had voluntarily left. Ultimately, it will be up to individual users to either choose one chain or recognize both as legitimate currencies.

This is one reason it’s so hard to tame bitcoin by, say, creating an exchange-traded fund so regular investors can get a piece of the action. The ETF filing for the Winklevoss Bitcoin Trust actually includes a provision specifying which bitcoin network it will support in the event of a split. Another ETF filing for Grayscale’s Bitcoin Investment Trust acknowledges that the fund will end up with equal values of two types of bitcoin, and must select one to keep in the fund. Thus far, Bitcoin Unlimited has secured support from the world’s largest mining operation, as well as adoption from about 10 percent of the bitcoin network. Unfortunately, the campaign suffered a minor setback this week thanks to a software bug:

Past rebellions have eventually faded. To make a credible attempt at a coup, Bitcoin Unlimited must recruit major exchanges, wallets, and other service providers. It’s not easy: People who treat their digital currency as real money tend to be risk-averse when it comes to new software. Even the developers of core bitcoin have not yet gained enough support to activate their upgrade. While the impasse might be aggravating for those who find bitcoin transactions too sluggish, it’s far better than a blockchain that is too easily modified. After all, immutability is supposed to be a feature, not a flaw.

  1. Incidentally, larger block sizes increase the risk of such partitions because nodes need to transmit more data to make sure everyone has consistent information.

  2. After a fork, the chain that is kept is the one that took more computational effort to create. It’s often the longer one, but not always.

  3. From the Winklevoss Bitcoin Trust S-1: “In the event of an upcoming modification to the Bitcoin Network that could potentially result in a hard fork with two separate and incompatible Bitcoin Networks, the Custodian, in consultation with the Sponsor, will elect to support the Bitcoin Network that has the greatest cumulative computational difficulty for the forty-eight (48) hour period following a given hard fork, in order to engage in bitcoin transactions and the valuation of bitcoin.”

    From the Bitcoin Investment Trust S-1: “If a permanent fork, similar to Ethereum, were to occur to bitcoin, the Trust would hold equal amounts of the original and the new bitcoin as a result. In consultation with the Index Provider, the Sponsor would select a Bitcoin Network (and therefore a single version of bitcoin). The Sponsor would simultaneously isolate the bitcoin on the Bitcoin Network that it did not select to segregate it from the Trust’s Bitcoin Holdings. The Sponsor’s intention would be to distribute to its Shareholders the bitcoin on the Bitcoin Network that it did not select.”

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member