Bitcoin, the reformation of banking and the reclamation of power by the consumer (OCT 16)

With Bitcoin wallets offering constantly advancing diversity there’s little reason to entrust your Bitcoin with a third party, exchange hacks are well publicised and we all should know the risks of using any third party to hold Bitcoin, so why would you trust anyone but yourself? Would you ever use a bank again?


Dis-intermediation is a key feature of Bitcoin, but intermediaries and banks are still going to exist, why? I’ll make a key distinction up front, Bitcoin will dis-intermediate undesirable intermediaries, many “legacy” business models are desirable therefore they’re applicable now and in the future.


Why do intermediaries exist when you can handle your own Bitcoin?
The most popular service they provide currently is a convenient exchange and guarantor step between the legacy finance system (fiat) and the Bitcoin world, this costs a small percentage per use and often the recipient has no idea the funds came from Bitcoin, this Bitcoin is usually instantly sold for fiat which is then credited into the seller account. The buyer gives his Bitcoin to an intermediary, they sell the Bitcoin, and the seller is credited with fiat.
Fiat to Bitcoin intermediaries add value by,

  • Allowing the seller to accept Bitcoin easily, adding another payment option.
  • Conveniently handling Bitcoin transactions on behalf of sellers.
  • Decreasing risk by using a trusted guarantor to handle fiat to Bitcoin transactions.
  • Avoiding Bitcoin volatility by instantly selling for fiat.

This area of exchanging fiat currency to Bitcoin has the potential to become fiercely competitive in order to attract custom, the profit margin is likely to be repeatedly slashed as close to zero as possible, yet a profit margin still exists currently as they provide a service that creates user value.

If everyone decides the service no longer offers value, is required, or has been successfully automated with 0% risk, it becomes undesirable and is dis-intermediated, i.e. ceases to exist.

So what about Bitcoin to Bitcoin services? They provide a fairly traditional method of escrow and have a profit margin, albeit thin, but with automated solutions being worked on such as segregated witness this is an area that’s likely to leave little remaining to necessitate anyone establishing themselves as a major player, it’s possible short to medium term to charge for providing this service, but any kind of successful automation will leave little in the way of an active user base willing to pay for an intermediary service.
The larger profit margins from the fiat to Bitcoin model do not apply here, no money is being “changed” so in order to add value a huge focus would have to be on trust, which when versus a machine offering trust-less services is hard to beat.

As with fiat to Bitcoin, if everyone decides a Bitcoin to Bitcoin intermediary service no longer offers value, is required, or has been successfully automated with 0% risk, it becomes undesirable and is dis-intermediated, i.e. ceases to exist.


So far we’ve looked at pretty basic models, the examples above highlight they’re dis-intermediated when they become undesirable, a choice made by the consumer.

Banking services are more complex business models when applied to Bitcoin, unlike the above examples dis-intermediation is unlikely to happen in the short to medium term, and in my opinion full dis-intermediation is unlikely to happen at all, now if you’re thinking “wait, hang on! I thought Bitcoin was going to end banks?” Maybe, the systemically corrupt legacy banking system perhaps, but we’re already seeing major institutions stepping into Bitcoin/Cryptocurrency, so they already have fingers in both pies, let’s remind ourselves what a bank is defined as,
“A financial establishment that uses money deposited by customers for investment, pays it out when required, makes loans at interest, and exchanges currency.”

We can see multiple layers of value in this definition, investment, loans & exchange, benefiting from one of these areas is the only reason you’d take the risk of entrusting your Bitcoin with a third party, and we’re talking about MtGox flavour risk here, failure by the bank or investment vehicle is likely in all cases to result in the total loss of all deposited capital, both parties know this, and so something long lost in legacy banking, trust, becomes key.


This is where it gets interesting, sure, a major player can setup in the Bitcoin space and offer financial services, but with Bitcoin anyone can setup as a “bank” as long as they establish enough trust via methods accepted by the consumer, transparent workings, provable earnings, state/government acceptance if the consumer deems it necessary (which in theory it’s not) The bottom line is, does the “bank” in whatever form it is regardless of being a one man band or a multinational, offer positive yield at an acceptable risk point? If the answer is no, the bank attracts no capital and walks the path towards dis-intermediation, therefore consumers seeking a profit become a driver of success or failure.

Profit being a driver in this manner puts an enormous responsibly on the consumer, if a “bank” (again in whatever guise) generates profits from loaning or investing using unethical channels such as, fraud, weapons, sex, drugs etc, but the consumers moral compass deems these ends justify the means of creating profit, then they exist. As we touched upon above, this is now the choice of the consumer, this may sound depressing but these practices already exist in the legacy banking system, the dramatic difference here is you have the ultimate choice in whether you wish to support and profit from nefarious activities, and let’s not forget as “illegitimate” business practises there would naturally be a high level of risk associated.

So, could a technically insolvent (and many are) legacy bank setup in the Bitcoin space and provide the same old dodgy services with impunity? Would it get away with not being transparent? I think the answer is yes with a “but” How long could that last? If it needs to bail it and its clients out they must buy from the open market in order to replace lost Bitcoin, this hammers down value and trust in fiat currency whilst increasing the price of Bitcoin ad-infinitum. Legacy banks could in theory rinse and repeat this practise, but that would drain fiat confidence to zero, again eventually returning the choice to the consumer.

But what about dis-intermediation!” Yes, in theory a sophisticated Bitcoin user could with the aid of advanced trust-less tools entirely manage their own investments and yield generation themselves without the aid of an intermediary (“bank”, “investment expert”, etc.) Eventually it’s likely that a suite of tools will exist that manage all investments in the most efficient risk/reward manner possible aligned with the users moral compass, but I think we’re quite a long way from that, and frankly the amount of time for everyone to get up to a sophisticated level to efficiently use such tools, or conversely the tool to get so advanced that even a circus chimp can manage their own investments effectively is likely to be many, many years from now, this is an area full of “investment experts” and will likely be so for the foreseeable future, the good news being Bitcoin offers transparency not seen in the fiat world, so at least said “investment experts” would face additional levels of scrutiny.

If consumers don’t want to profit from weapons or opaque/unethical practices and can effectively boycott, those services become undesirable and are dis-intermediated, i.e. cease to exist.
If a suite of tools is created that allows all consumers to entirely manage their capital without the aid of “investment experts” they become undesirable and are dis-intermediated, i.e. cease to exist.
If banks don’t provide yield at a risk point everyone finds acceptable, they become undesirable and are dis-intermediated, i.e. cease to exist.


We’ve established the Bitcoin system has areas to generate profit and thus offer positive yields, crucially this is at a time when the legacy fiat system is running at zero to negative interest rates guaranteeing the loss of money. It seems likely in the chase for a return on investment more and more will begin to run to assets like Bitcoin, (or indeed anything that can offer a positive yield) as money escapes the legacy system to Bitcoin the scales begin to tip from fiat to Bitcoin transactions to Bitcoin to Bitcoin transactions. This is an important step as it’s indicative of Bitcoin to Bitcoin transactions being “the norm” and a significant confidence boost to the Bitcoin system, in turn leading to further Innovation and profit generated in the Bitcoin space, the very issues causing people to run from the fiat system are compounded further accelerating capital outflow from legacy systems, like a black hole as more value and opportunity is added to the Bitcoin side, the more it sucks in…

I class the paradigm shift as when Bitcoin to Bitcoin transactions overtake fiat to Bitcoin transactions, but we all have our own thoughts and definitions.
Let’s take a look at scenarios in which a paradigm shift could be greatly accelerated,

  • Single or multiple Bitcoin investments outperforming fiat investments, the higher profile the better, causing capital flight to Bitcoin.
  • Major fiat entities “churning” to ramp the Bitcoin price, I’m speculating on the fact that fiat can be created ex-nihilo in theory to support any price.
  • Major fiat entities setting up Bitcoin businesses, failing, then honouring “failed” obligations by purchasing Bitcoin on the open market at any price necessary.
  • Fiat insured Bitcoin exchange failure triggering forced fiat purchases of Bitcoin on the open market. (more here)
  • Any of the above scenarios, or a scenario in which confidence in fiat is severely undermined.
  • The development of one or more killer apps leading to further widespread adoption of Bitcoin.

I’m sure this document may need revising now and again, but one thing is for definite, there’s a lot of change on the horizon, stay safe out there and thanks for reading.