What are the risks and benefits of having Bitcoin in a bank?

“Bitcoin banking” (BTC) is a rather eye-catching concept that has been permeating the current financial system. With the changing economy, traditional banks are starting to offer this digital currency, either as an investment asset, or as a cryptocurrency in the full expression of the word, but what do Bitcoin gain and lose with this?

First of all, it should be noted that, for the purposes of this report, when we refer to “Bitcoin Bank,” we are not referring to a banking entity dedicated exclusively to cryptocurrencies. And it is not about exchanges or specialized exchange companies, which are, in one way or another, “Bitcoin banks” (because they guard Bitcoin for their users). Referring to those traditional banks that have started offering cryptocurrencies to their customers..

Bitcoin, for its part, “does not do business with banks.” Do not need a third party to be exchanged. This makes it a natural enemy of conventional banking. Now, with the banking system offering these types of crypto assets, it is worth considering what type of bitcoin they are actually selling.

Bitcoin Banks, Trend

Currently, there is a lot of talk about banks that offered bitcoins to their customers; For example, Brubank and Galicia in Argentina. these They are traditional banks that offered their customers investment centers in bitcoin. However, a few days after the launch, due to a setback, the offer of this type of investment was banned by the Argentine Central Bank.

At Banco Galicia, people can buy BTC with Argentine peso as per the market price. Source: screenshot – Banco Galicia app.

This kind of Bitcoin exposure is nothing new in the current banking system. Banks like Morgan Stanley They offer Bitcoin investments, but only to exclusive clients. An investment portfolio in excess of $2 million is required, as detailed in this medium.

In the case of Argentine banks, the advantage was that anyone with a bank account could buy bitcoins. Despite the limitation that he could not withdraw it from the bank, and the preservation remained in the hands of Lirium, Inc. In addition, BTC purchased was non-convertibleIt was only used for trading within the bank.

There are also banks where bitcoins can be withdrawn, such as Xapo and Kraken Financial. The latter is a subsidiary of Kraken Exchange, and has received a license to operate as a banking entity within the territory of the United States.

What do bitcoins lose in the bank?

Bitcoin is a peer-to-peer (p2p) electronic cash system, as described by its co-creator, Satoshi Nakamoto (person or pseudonym). As CriptoNoticias Criptopedia explained, the solution that Bringing Nakamoto to the world to enable the digital exchange of value without the need for a third party. Dre there is “peer exchange”.

A statue of Satoshi Nakamoto in Hungary represents the creator of Bitcoin. Source: CGTN.

There is no need for banks for Bitcoin to operate. The custodian is each person who decides to use Bitcoin and where they decide to store it (wallets).

In a bank, if bitcoins cannot be withdrawn, there is no chance for a person to be a custodian of his bitcoins. also Peer-to-peer free exchange is disabled. It is the bank that will store and protect everyone’s BTC.

With bitcoin on hold, coins are quite vulnerable. The perfect thing for bitcoin is that every user owns the coins they store. With a third party trustee, Bitcoin is left vulnerable to confiscation, hacking and theft.

This type of issue has been repeated throughout history. Bitfinex, one of the largest bitcoin exchanges, was hacked in August 2016, and refunds did not begin to be issued until December of the same year. Years ago, Mt.Gox, one of the first bitcoin exchanges, went bankrupt after a hack in 2014. Despite compensating part of the stolen funds, the company failed to recover the full loss.

Regarding confiscation, as long as bitcoin is not considered an illegal asset, the state does not have the power to confiscate someone’s BTC if there is no ongoing judicial investigation. However, the ban on bitcoin is within the reach of regulators. An example is China, where its central bank has designated any bitcoin transaction as illegal. Its possession remains legal, but it cannot be replaced within the framework of the law.

Here it should be clarified that Bitcoin (at the protocol level) does not need to be regulated in order to use it. In the case of China, Bitcoin can continue to be used outside the law, as the state has no repercussions for the operation of the network.

Now, what about the banks that allow bitcoin withdrawals? Well, although self-custody is maintained, privacy is violated. This is because, in order to buy bitcoin on these platforms (just like on regulated exchanges), it is necessary to pass identity checks, which in turn link BTC withdrawal address information with user information.

Tools such as AOPP, used to verify ownership of Bitcoin addresses to withdraw BTC, are used to track funds within the Bitcoin blockchain.

What can a bank give to Bitcoin

Banks may break many of the characteristics of what Bitcoin is, however, on a legal level, they can offer a powerful tool for adoption.

Banks are subject to regulations. The supply of bitcoin in the bank will depend on local legislation. in El Salvador, The first country to adopt Bitcoin as a legal currencyIts Bitcoin Code states that all economic entities must accept BTC, from merchants to banks. Banking entities such as Banco Agrícola are starting to take the first steps, offering credit card debt repayment through BTC. Other banks have also reported activation of payment channels where bitcoin can be used.

On the other hand, the Development Bank of El Salvador is currently serving as a bridge for those who, under local legislation, are forced to receive bitcoin, but do not want to. In this case, the bank absorbs the risk, Accept the bitcoin exchange rate and pay the equivalent in fiat money.

Development Bank was the first banking entity to activate Bitcoin payment channels in El Salvador. source: Bandesal / Twitter.

This allows people to have a relative approach to BTC, since the decision to be the custodian of their bitcoin or to sell it is up to them.

On the other hand, banks can act as a vehicle for obtaining loans with collateral in Bitcoin. At the Bitcoin 2022 conference, held last April, Abra CEO Bill Barhit commented that Bitcoin could be the “banking service of the future.” By acting as collateral for applying loans and mortgages.

Currently, there are dozens of non-banking platforms that offer this type of loan. According to the figures, at the beginning of 2021, more than 400 thousand BTC were used as collateral for loans.

The use that banks allow to give away Bitcoin depends on the service they provide. If it is just an investment asset subject to price fluctuations, then it is not Bitcoin. On the other hand, if it is possible to withdraw and maintain self-custodianship, it is Bitcoin. This, of course, considering that buying bitcoins through banks (or any regulated entity) would add disadvantages in terms of privacy and anonymity.

Bitcoin means responsibility

Although self-locking provides privacy, free circulation, and hides state controls, security and protection depend on each user. It is the person who has the responsibility to keep your BTC safeunder different media.

From choosing the wallet to the receipt given to the redemption seed, every step is important when using Bitcoin.

This responsibility we are talking about lies with certain people. At the company level, protection and security requirements may vary. So, There are escrow services that delegate the security of BTC to a trusted third party. The growth of this type of service has been significant. According to a report by the research agency Blockdata, in 2021 the use of this type of service grew by more than 400%. With a reserve capital of more than 4,500 million US dollars.

A Cryptocurrency exchange, such as Coinbase or Blockchain.com, offers services of buying and selling BTC with custodianship. Source: Blockdata.

Although custodians are independent companies, they often work closely with banks and financial institutions that provide bitcoins. This is because, in essence, BTC protection is outsourced, and additional backup is guaranteed on deposits, since most of these services offer insurance policies on BTC deposited.

In short, the presence of bitcoin in a bank causes these currencies to lose some of their distinctive properties. However, it may be useful to some people or entities in certain circumstances. In addition, there will always be the possibility of working with BTC in the Bitcoin network itself, outside the banking system.

 

 

 

 

 

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