Slammed doors and old mistakes

by · August 24, 2022

Despite Bitcoin’s (BTC) promise of a peer-to-peer world, building a Bitcoin-first business in 2022 still requires third-party intermediaries. Whether it’s seed capital, using fiat money, or simply leveraging fiat payment rails, means Bitcoin business interaction with the legacy financial system.

For the vast majority of Bitcoin-based businesses, this means they likely need a bank.

Cointelegraph spoke to Bitcoin-only businesses about their experiences working with banks, given that Bitcoin ends up getting a lot of bad press in the mainstream media. In addition, some of the banking industry’s biggest supporters love to bash Bitcoin. Ben Price, founder of the Bitcoin Company, recently shared that the company had lost “dozens upon dozens of banking partnership opportunities simply because we are a Bitcoin company.”

Price was a product manager at Visa for years before founding the Bitcoin Company. He told Cointelegraph that the Bitcoin Company’s “goal is to bring Bitcoin to the whole world” because it is “a real catalyst for improvement in our civilization.”

Price became frustrated while working at Visa – not because he was a “hardcore Bitcoin maxi”, but because of slow progress. According to him, projects related to payments, central bank digital currencies (CBDC), non-custodial wallets and more were regularly closed or mothballed. In addition, the internal functions of the old financial system were questioned. Carman told Cointelegraph:

“And at the end of the day, Visa kind of serves the banks. They don’t serve the consumers.”

The Bitcoin Company is part of a new crop of Bitcoin “neobanks” – banks that treat Bitcoin as its own currency alongside fiat. From The Bitcoin Company in the US to Xapo in Gibraltar and CoinCorner in the UK, Bitcoin neobanks are flexing their financial muscles. In short, they allow people to live on a Bitcoin standard and easily interact with the legacy financial system.

Carman explains that Bitcoin neobanks stem from a desire to “hyperbitcoinize” – i.e. stimulate mass adoption of Bitcoin – while admitting that only a small group of people will adopt Bitcoin as the cypherpunks originally intended. He divides Bitcoin users into two pools: the cypherpunks who prioritize privacy, bury their seed phrases in the yard, mix the coins and run Bitcoin nodes; and the other 95% of people – like his mother and sister, he explains – who will likely need access to a Bitcoin neobank. According to Carma

“Bringing Bitcoin to the most people around the world will likely require a gradual transition from legacy fiat systems to a Bitcoin standard. And to do that, you need to provide for both pools.”

But why can’t banks integrate Bitcoin and leverage the new technology and profit from Bitcoin’s success? Christian Ander, founder of Swedish Bitcoin exchange BTCX, told Cointelegraph, “Many banks have a policy of not engaging with or onboarding Bitcoin and crypto companies. It doesn’t matter if the company follows the regulations or not.”

Ander visited the bank that came on board his company. Source: Twitter

Danny Brewster, CEO of Bitcoin trading platform FastBitcoins, told Cointelegraph that Bitcoin-only banking companies like FastBitcoins have persisted since 2013. However, banks initially did not want to do Bitcoin business due to a “lack of understanding,” Brewster told Cointelegraph.

Fast forward to 2022, and “Despite regulatory clarification and increased scrutiny, the broader crypto market is a mess with the likes of LUNA, 3AC, etc.” Brewster explained that because of the Terra implosion and subsequent crypto contagion, banks are even more risk averse. He said:

“Banks see this, coupled with payment fraud issues as a massive red flag and headache they want to avoid. […] I used to naively think it was because they were afraid of being replaced by Bitcoin, and time has proven this thesis wrong.”

Brewster stated that crypto fraud, money laundering and the darker side of crypto are tarnishing Bitcoin’s reputation: “In one case at a bank 90%+ of all payment fraud cases touched ‘crypto’ at some point in the stream, it’s obvious why as the resulting transaction gives the criminal irreversible funds at the end of the transaction.” The constant repetition is likely to color one’s opinion of Bitcoin, he explains, as Bitcoin and crypto are considered one and the same:

“When your days are spent dealing with this, it will influence your views on everything to do with the space, and those people also have input into who the bank chooses to do business with.”

Anders explained that there are many reasons behind banks’ reluctance to onboard Bitcoin businesses, from “incompetent anti-money laundering staff and routines regarding Bitcoin and crypto-assets” to “old money vs. new” [money]”debate. However, he suggested that it is wrong to think that Bitcoin is a threat to the bank’s core business model. “Actually it is not, but the central bank’s digital currency is.”

Brewster claimed that “CBDCs will go the way of every shitcoin partnership that is announced,” hinting at their eventual demise. But if CBDCs succeed, commercial banks may face some competition from an unlikely source.

Related: Banking uses 56 times more energy than Bitcoin: Valuechain report

Finally, Hal Finney, the first person to mine Bitcoin after Satoshi Nakamoto, predicted the existence of Bitcoin-backed banks in 2010. Finney highlighted scalability issues as the reason for such banks, although the Lightning Network has evolved to allow Bitcoin to process infinitely more transactions. Meanwhile, even if there are solutions, Bitcoin-first businesses may be forced to continue to “cooperate” with banks.

In addition, Carman admitted that while working with banks is a headache, “many merchant partners refuse to work with us (i.e. let us sell their gift cards) because we allow users to buy with Bitcoin. […] So everything is not on the bank side.” Although there are some hopeful signs of Bitcoin payment adoption, fiat is king while FUD reigns almighty.