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Michael J. Casey is Chair of the CoinDesk Advisory Board and Senior Consultant for blockchain research at the MIT Digital Currency Initiative.
The following article originally appeared in CoinDesk Weekly, a personalized newsletter distributed every Sunday exclusively to our subscribers.
When five years ago, I visited some of the Bitcoin start-ups in Hong Kong unanimously, their biggest challenge was to find a bank that would allow them to open an account.
It was not that the local banks were particularly worried about this new misunderstood industry. The problem was that correspondence banks obsessed with compliance in the United States required their counterparts in the United States to apply a particularly strict standard of "customer knowledge" for bitcoin businesses. Since Hong Kong banks could not live without a dollar buoy from New York, the least resistance was to say no.
This situation was a lesson on how the dollar's reserve status leaves US financial institutions and Washington regulators whose advice they follow, exerting considerable global influence – in this case, limiting innovation, where it happens.
In 2019, the exchange of a Hong Kong-based cryptocurrency issuer with a dubious Panamanian entity reminds us that little has changed.
The lack of access to reliable and conventional credit and payment facilities, as well as the dangerous measures taken by the cryptocurrency exchanges to solve this problem, continue to be the Achilles' heel of the sector.
Despite initial fears over the New York Attorney General's allegations that the exchange, Bitfinex, would have used funds from the tightly linked Tablecoin, Tether, to hide a $ 850 million undisclosed shortfall, there could be have light at the end of this multi-year tunnel.
To find it, you have to look at other developments in the areas of banking, blockchains and cryptocurrencies.
It can be argued that new cryptographic technologies and business models will foster a sufficient mix of greed and fear to bring banks to a more accommodating stance towards cryptographic entities.
Bitfinex-Tether: a banking problem
For the moment, however, banking challenges remain numerous for cryptographic companies. The situation of Bitfinex and Tether is proof of this.
The integrity of Bitfinex is naturally questioned by many. But it is true that if it had been properly banked, the Hong Kong Stock Exchange would not have had to deal with the payment processor Crypto Capital. (According to the NYAG report, Bitfinex sought to recover $ 850 million held by this Panamanian company and in the meantime used Tether's reserves to fill the gap left by this deficit in the balance sheet of the stock market.)
Moreover, if stock exchanges like Bitfinex had access to bank accounts for liquidity, Tether would never have been so integrated into a significant part of the bitcoin clearing system.
In 2015, shortly after the adoption of its current name following its founding as Realcoin in 2014, Tether established a close relationship with Bitfinex. The stock market opened the trading of Tether USDT tokens, which, promised by the stable supplier, could be traded at $ 1 to $ 1, before starting to use them to meet liquidity needs that banks did not provide. not.
Then, as Bitfinex grew, creating counterpart relationships with many other exchanges, they also started using the USDT for the same purpose. Rather than offsetting client transactions through cumbersome transactions in the banking system that require extensive institutional support, stock exchanges could freely manage their fiat-to-crypto float by entering and exiting a de facto crypto dollar.
After a while, however, this model was undone. The loss also comes from the same root cause.
In order for Tether to always defend the assertion that a USD token amounted to one dollar, she had to convince investors that she had the equivalent in real dollars in reserve in one or more several banks. Thus, when doubts about Tether's audits dissipated over its banking relationships, confidence dropped and the token lost its market connection. This, in turn, puts pressure on Bitfinex and deepens its problems with Crypto Capital.
In summary, it is fair to say that the persistent concern of the bitcoin market regarding a house of Bitfinex-Tether cards would not exist if the banks had more easily managed bitcoin exchanges.
L & # 39; s end
If that was the complete story, it would be difficult to see how that ends. After all, by creating additional uncertainty about liquidity and price volatility, this latest crisis is further reducing the role that bitcoin plays in the minds of regulators and bank compliance managers.
But there is a way out of this trap that is perpetuated. Such a solution stems from the need for banks to find new sources of revenue in a post-crisis era in which their margins have been squeezed by low interest rates, additional risk constraints and strict compliance requirements. Products based on cryptography, if not the cryptocurrency themselves, could offer such an opportunity.
One of the opportunities lies in the security tokens, which, once they are mature and benefit from the regulatory benefits, promise to give fundraising companies and fund managers more access. broad and more efficient capital and investment. They combine the comfort and compliance of a regulated instrument related to real assets such as stocks, bonds or real estate at the cost and efficiency of a disintermediated issuance and management. , reconciliation, settlement and reconciliation of automated intelligent contract transactions.
Security chip offers, or STOs, are not as subversive as ICOs. Initial offerings of parts were, for the most part, no real underlying asset, but instead promised the value of a commodity-like "utility" within the economic model and incentive of their blockchain-based network. Crypto-Puritans also denounce the fact that the STOs rely on trusted third parties to preserve the underlying assets and only exist on the whim of government regulators.
But precisely because they could win the blessing of regulators and the participation of traditional companies, the STOs draw attention to Wall Street. Recent news that Societe Generale has tested an STO based on the Ethereum public blockchain has propelled this interest to a higher level.
STOs may redundant some of the back office functions of investment banks, but the market-making, risk management and underwriting costs of STOs could largely offset this loss, at least for a time.
The missing piece
But to reach the STO's ideal state, another piece of the puzzle is needed: a payment token.
That's why I'm seeing more and more banks offering services and support to the emerging new generation of sophisticated back-to-back coins. Those proposed by Gemini, Paxos and the consortium formed by Circle and Coinbase already have much deeper and well-regulated banking relationships than anything that Tether could claim. (I see banks that prefer these stable coins to JP Morgan's JPM coin, why reward the technology of a rival bank?)
Here is the thing, though. As a more secure, stablecoin ecosystem emerges, it will also bring stability to the native cryptocurrency market for block chains, such as Bitcoin. The stock exchanges will have a more reliable digital source of immediate cash.
In the end, they will no longer even need to keep their customers' fiat deposits, thus ending catastrophes such as QuadrigaCX. All this will contribute to the maturation of crypto-currencies in general, allowing them wider adoption as an alternative and competitor of the fiduciary system.
This brings us to a somewhat ironic conclusion for the crypto true believers who yearn for the end of the centralized banking system and a digital store of non-fiat value: the road to utopia can be paved with transactions with bankers and government regulators.
Fastener image via Shutterstock
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