Bitcoin Banks Are Coming. Should That Make You Nervous?

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It’s funny… I was re-reading the Bitcoin white paper last week as it’s now ten years old.

Bitcoin’s founder Satoshi Nakamoto constantly refers to bitcoin as a way to avoid using a “trusted third-party,” like banks or financial institutions.

And yet it seems like all anyone can talk about right now is Wall Street adoption of crypto and banking bitcoin.

Just look at what happened in the last few weeks:

1. Coinbase is now a “qualified custodian” to hold cryptocurrencies in New York (the same designation given to banks that hold your money). (CoinDesk)

2. Mastercard filed a patent to launch a “fractional reserve” crypto bank. (CCN)

3. Bank of America filed a patent for a crypto storage system. (CCN)

3. Gemini announced full insurance for its exchange and custody service. (Block Explorer)

4. BitGo is approved as a qualified custodian to hold cryptocurrencies. (Bloomberg)

mastercard bitcoin
Credit: Cryptocoinmastery

None of these stories are groundbreaking on their own.

But it’s a very clear trajectory. Major “third party” institutions are competing to hold (or bank) cryptocurrencies on behalf of others.

What we’re talking about is the quiet emergence of bitcoin banks.

Are “Bitcoin Banks” a Good Thing?

Yes!

On the one hand, cryptocurrency institutions like Coinbase, Gemini, and Bitgo are taking storage security seriously. With almost $1 billion cryptocurrency stolen in exchange hacks this year alone, we need to provide better security and storage options for traders.

Secure custody also gives confidence to institutional investors who are looking to enter the space. Arguably, the next big influx of capital will come from institutional investors, who need trusted custody before making large investments.

No!

Bitcoin was designed to operate outside the banking system. It was created so that you don’t have to trust a bank or third-party.

Crypto evangelists (ourselves included) have always advocated keeping your cryptocurrency off exchanges entirely. Unless you’re trading large volumes of crypto every day, there’s no good reason to store your bitcoin on Coinbase, Gemini or any other exchange.

Instead, you need a safe, offline, cold-storage solution where you control the private key (with backups, of course). It might be more hassle, but it’s worth it for peace of mind and security.

Further reading: 8 Cryptocurrency Best Practices (Keep Your Crypto Safe)

It seems our newsletter subscribers agree, especially when it comes to big banks wading into crypto storage. We asked them, on a scale of 1-10, how much they would trust an institution like Bank of America to look after their cryptocurrency. Every respondent picked either one or two out of ten.

Conclusion

Like it or not, bitcoin banks are coming. It might start small with custody solutions at Gemini and Coinbase, but the big-names are slowly getting involved. While this should bring more legitimacy to the cryptocurrency world, there are worrying ramifications, too. Mastercard filing a patent for a “fractional reverse crypto bank” is a worrying precedent that pulls bitcoin towards the very system it was designed to avoid.

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Ben Brown

Editor, Block Explorer News

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