The Rise of Bitcoin Banks: What Will Bitcoin Look Like in 2020?
This article, written by Shinobi ten years ago, explores what Bitcoin would be like in 2020. The first article in this series, “How did practitioners in 2010 view the BTC ecosystem ten years later?” can be found here. The second article, “How did practitioners in 2010 view the BTC construction road ten years later?” can be found here.
The rise of Bitcoin banks, or Binks, is happening. Germany has approved banks to start custodial and payment processing services for Bitcoin and Bitcoin accounts starting in 2020. Who will be the first?
This is something people will go crazy about, and I understand why. However, in the end, I believe this will not happen, and it is a naive and childish idea. Firstly, the existence of banks is not just for safekeeping money and processing payments. They provide loans. They do this for a reason, and it is a useful thing for the economy and society. It provides returns to liquidity providers (with risk) and allows entrepreneurs to engage in ventures they would not be able to fund otherwise. Just based on this, it guarantees their continued existence. Loans are based on trust, and they require coordinators and personnel to manage and track them. They require a central point: banks.
That being said, I guarantee they will thrive only by custodial Bitcoin and processing payments on their private second layer. People like having someone to call for customer support, they like having remedies when there are issues, and they like having experts handle things they are not good at. That is why people have Google or Facebook accounts instead of running their own SMTP servers or decentralized social media nodes. Now, I do believe things will move in that direction, and we have seen the beginning of this trend, but this trend will be a generational thing. It will not happen overnight, and it may not even happen in our lifetime. Or maybe things will just move in that direction and waver before truly going to the extreme. Who knows. But what I do know is what the world is like today, and I do know the reasons for the world being as it is today. So, this will happen, believe it.
But do not be afraid, all is not lost. Centralized but private digital cash has been made possible since David Chaum’s initial design of “Ecash” in the 1980s. Extending these designs to include more complex “smart contract” analogs and executing them in a centralized manner might not be impossible, or even relatively difficult.
Offering Bitcoin-denominated accounts without the need for KYC/AML intrusion or doxing is entirely possible. The barriers for these things are not technological, but legal, regulatory, and social. These are things that can be shaped and guided. Yes, it takes a tremendous effort to remove these types of barriers, but it cannot honestly be said that it is impossible.
There is even an incentive mechanism pushing people in that direction: regulatory arbitrage. Given that Bitcoin is global and entirely digital, any jurisdiction that relaxes financial service regulations and laws can see income pouring in from all over the world by doing so.
Political Stage
We are now under the spotlight of the global political stage. Ignoring this would be self-defeating.
Yes, Bitcoin as a technology is non-political. Neutral. All technologies are neutral. But if you try to say that Bitcoin’s impact on the world around it is not political and does not politically support the choice between personal freedom and authoritarianism, then you are asleep. I am an American, so this will be somewhat centered around the United States, so we will say it this way:
Right-wing: Tending towards Republican. I’m not saying it embodies this, just that it is a milestone in that direction.
Left-wing: Tending towards Democrat. Similarly, disclaimer as above.
Bitcoin’s mere existence shapes an environment favorable to right-leaning political structures. Structures that behave favorably towards those who put personal freedom above all else. The stronger Bitcoin becomes, the more it shapes the environment around it to support this political structure. That is reality. As Bitcoin grows stronger, politicians inevitably start framing it in left-wing and right-wing terms. They do so because that is what politicians do, and there is a kernel of truth in that framing, amplified with exaggeration, lies, and hyperbole.
This divide may primarily center around two issues:
Wealth inequality: Bitcoin will become a hot topic related to this issue. Bitcoin will certainly redistribute a significant amount of wealth, but it is not enough.
Environmentalism: Claims that Bitcoin is harming the environment will not go away soon.
I could be wrong, but personally, I believe these dynamics are almost set in stone. This is just the current tug of war between Bitcoin and the global political spectrum. There is a massive tug of war happening everywhere between localized small-scale sovereignty and the transfer of sovereignty to large sovereign entities that are not so localized. Bitcoin naturally empowers and encourages the former and is the enemy of the latter. As Bitcoin’s scale continues to grow, it will become more closely entwined with politics all over the world, and this may be the rough outline of how it will play out.
This will happen at the national level, state level, and over enough time, possibly even down to the city level. Ultimately, it will transcend international institutional debates over the extent of regulation to deal with Bitcoin. It will start entering the realm of alliances formed between nations based on their stance towards Bitcoin. Once things truly escalate to that level, it is genuinely an open question how things will develop.
You have two choices:
Work within the local political process to push things in the direction of small-scale localized sovereignty.
Retreat to places where you can exit the political process and its outcomes, and keep quiet and abide by its results where you cannot exit the political process and its outcomes.
Choose wisely.
Liquidity is Changing the Cryptocurrency Market
Bigger market = more liquidity = more participants. This has been deeply happening over the past few years. When the last bull market ended, the first cash-settled Bitcoin futures were listed. Since then, we have seen various Bitcoin products traded on traditional financial platforms start (and stop) trading. We now also have physically settled (delivering real BTC) futures on Bakkt, as well as options on those futures and their own cash-settled counterparts.Futures Products: German bank authorized to handle and offer cryptocurrencies to its clients. Over the years, Swiss financial institutions and organizations have maintained a friendly relationship with the ecosystem.
The entry of these types of institutional entities and liquidity pools into the field will fundamentally change the structure of this market. This will be accompanied by government regulations, restrictions, and requirements, which are common in the traditional world. The amount of liquidity attracted to these platforms built by these participants in the market will determine the extent to which traditional government regulations and reactions have an impact on the entire ecosystem within the market and pricing mechanisms. The more liquidity on these restricted platforms, the more indirect control the government has over the Bitcoin pricing mechanism. This indirect control over the pricing mechanism could translate into a degree of loss of indirect control over the outcomes of future consensus disputes. This is something to be cautious about.
In my opinion, the influx of a large amount of liquidity into this market will easily squeeze out those unreliable and non-KYC speculative traders that currently occupy a significant proportion of the market platforms.
This will make the entire market more restricted and more difficult to avoid government bureaucracy and regulation, and it may even be difficult to maintain ideal consensus on the protocol itself if it persists to that extreme. This is likely to lead to a clear divide between the black market and the transparent market in terms of Bitcoin trading platforms, and even Bitcoin itself, if things do not develop according to our wishes, Bitcoin upgrades will eventually bring about significant privacy improvements. Or, if we reside in a jurisdiction that recognizes the right to privacy and yet we become lax in defending our own privacy rights, then this situation is changing and must be adapted to regardless.
Decentralized Infrastructure
Twitter censorship. Facebook censorship. Youtube censorship. Political bias. Political intervention. Even DNS and VPS censorship. This is the world we live in, involving companies that provide services on the internet or operate internet infrastructure. This situation is not universal, and this censorship is not uniformly applied to all things or activities, but it is an increasingly growing trend.
This needs to be attacked both socially (though in a very thoughtful and cautious manner) and technically. Fediverse is an experiment that creates a middle ground between protocols and services through their federated environment, where anyone can run Mastodon instances (and many other things) and connect them through federation. Bluesky is a recent initiative by Jack Dorsey of Twitter, aiming to explore the feasibility of transforming Twitter from a private service to an open protocol and attempting to do so if feasible. We also have goTenna developing consumer products for truly decentralized data transmission infrastructure. Bandwidth is limited, but it’s a start. There are also many DIY mesh networking projects.
This reminds me of the efforts directly related to Bitcoin itself. goTenna has collaborated with Samourai Wallet to develop txTenna. This allows someone to initially broadcast their Bitcoin transactions through a mesh network to hide their identity, passing the transactions locally through goTenna networks until they find a node that can push them to the Bitcoin network via the internet. Venezuela also has the LochaMesh project, which emerged from the country’s unstable electricity and intermittent internet access. Their design combines communication tools with Bitcoin and Lightning Network functionality, and to the best of my understanding, they are trying to push their DIY project towards a commercial direction for easy consumer access.
I would be remiss if I did not mention the Blockstream satellite feed. I wouldn’t call it fully “decentralized” infrastructure, it is still very centralized, but I think it is a significant change and it would be foolish to overlook it. Firstly, it is centralized. It relies entirely on centralized companies’ satellites, which can be shut down at any time. Secondly, it is free and completely private. As a one-way broadcast from satellites, all you have to do is set it up and point the antenna to the sky, and you will receive the Bitcoin blockchain. This doesn’t leave network fingerprints to identify you as a Bitcoin user, and one of its benefits is free transmission of large amounts of data. So, you rely on central entities but gain a great deal of privacy.
In the next decade, these types of projects, as well as different ways of designing and operating infrastructure, will continue to flourish on the fringes of Bitcoin and the internet. There are many ways to write these things. I think this integration can go further. Mesh and radio technologies alone are not sufficient to expand the entire network on a global scale, but they can fill in the gaps or handle the distribution of “subnetworks” that primarily focus on transmitting transactions and validating blocks. Nodes can receive blocks from satellite feeds and then propagate them through short-range mesh networks that can handle higher throughput. This synergy can even extend to mining; using compact blocks, miners can transmit only the block headers and a small portion of data to construct actual blocks from your mempool. If the trade-off in latency is feasible, miners can try to slightly conceal their physical location during block propagation using these types of mesh networks, while still receiving real-time blocks through anonymous satellite feeds.
I also see great potential in the coexistence or integration of the Lightning Network and mesh network technologies. Global Mesh Labs is developing the Lot49 protocol, which integrates the Lightning Network to pay for data relay fees, thereby incentivizing mesh network nodes. This is a very interesting direction that can develop synergies between Bitcoin and mesh network protocols, but its feasibility is yet to be observed. Personally, I am very optimistic but have cautious expectations. Even without this tight integration of the two, mesh networks are very useful for Bitcoin. I think the growth of localized Lightning subnetworks is inevitable, where everyone interacts with their peers through mesh networks, interacts with locals only through mesh networks, and receives feedback from the blockchain for security. Some bridge nodes can move funds in and out of these subnetworks as needed. On a global scale, this kind of network structure makes sense to me and seems to be a natural pattern that will emerge.
These things will not become mainstream in the next decade, but with stubborn individuals and enthusiasts rapidly iterating at the fringes, rapid progress and development are expected.
