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Banking, Bitfinex and The Hidden Irony of Cryptos latest controversy




Michael J. Casey is the head of CoinDesk's Advisory Board and a senior blockchain research adviser at MIT's Digital Currency Initiative.

The following article was originally featured in CoinDesk Weekly, a custom newsletter delivered every Sunday exclusively to our subscribers.


When I visited some early bitcoin startup in Hong Kong five years ago, they were unanimous about their biggest challenge: finding a bank that would let them open an account.

It was not that local banks were particularly concerned about this little understood new industry. The problem was that consent-based correspondence banks in the United States demanded that their counterparts in the territory use a particularly high "know-your-customer" standard for bitcoin businesses. Since Hong Kong banks could not live without a New York dollar dollar, the path of least resistance was to say no.

This situation was a lesson on how the dollar's reserve status leaves US financial institutions, and the Washington regulators guidance they respect, exert deep worldwide influence ̵[ads1]1; in this case, restricts innovation wherever it happened.

Fast forward to 2019 and reports of a high-profile Hong Kong-based crypto exchange problem with a dubious panamanian entity offers a strong reminder that little has changed.

The lack of access to reliable ordinary credit and payment facilities, and the risky steps taken by crypto exchange to address this problem, continue to be the sector's Achilles Heel.

Nevertheless, despite the initial market jitters provoked by the NewYork Attorney General's claims that this swap, Bitfinex, used funds from closely associated with stablecoin provider Teth to mask an unknown $ 850 million loss, it may be light at the end of this perennial tunnel.

To find it, you need to look at other developments in banking, blocking and encryption.

It is a matter of being made that new cryptographic technologies and business models will promote a sufficient mix of greed and fear of driving banks to a more accommodating attitude with crypto devices.

Bitfinex-Tether: a banking problem

For now, but banking challenges remain rife for cryptic businesses. Bitfinex and Tethers situation is proof of that.

Bitfinex's integrity is understandably questioned by many. But it is true that if it had been properly beaten, the Hong Kong exchange would not have had to do business with the payment processor Crypto Capital in the first place. (According to NYAG's report, Bitfinex attempted to recover $ 850 million from the Panamanian firm and meanwhile, Tethers used reserves to make that gap in the stock market balance.)

Further, if Bitfinex had access to liquidity bank accounts, Tether never been so integrated into much of the bitcoin market's clearing system as it did.

In 2015, shortly after, adopted its current name after its founding as Realcoin in 2014, Tether forged a close relationship with Bitfinex. The exchange rate opened trading in Tethers USDT tokens, which the stable vendor promised, could be redeemed one by one for dollars, and eventually began to use them to resolve the liquidity needs that the banks did not provide.

When Bitfinex grew, creating counterparties with several other exchanges, they also started to use USDT for the same purpose. Instead of clearing customers' trades through pervasive banking system transactions that require deep institutional support, exchanges can freely control their fiat-to-crypto flow by moving in and out of a de facto crypto dollar.

After a while, however, this model was enchanted. It is also disturbed by the same reason.

For Tether to consistently stand up the claim that a USDT token was a dollar, it had to convince investors that it had equivalent in actual dollars in reserve with one or more banks. So, when doubts about Tethers audits blew themselves into concerns about bank relations, confidence fell, and the symbol lost its stick in the market. This put pressure on Bitfinex and reinforced its problems with Crypto Capital.

In summary, it is fair to say that the bitcoin market's persistent concern for a Bitfinex-Tether short would not exist if the banks had slightly serviced bitcoin exchanges.

The way out

If it was full story, it would be difficult to see how it ended. After all, in connection with further uncertainty about liquidity and price volatility, this latter crisis only reduces bitcoins standing in the minds of regulators and bank correspondents.

But there is a way out of this independent trap. Such a solution is due to the banks' own need to find new sources of income in a post-war period, where their margins have been pushed by low interest rates, increased risk limits and high requirements for compliance. Crypto-based products, even if they are not crypto-curves, can offer such an opportunity.

An opportunity lies in security tokens, which, when matured and serve legitimate blessings, promise to provide brokerage and fund managers with broader and more efficient access to capital and investment. They combine the comfort and compliance of a regulated instrument associated with real assets such as stocks, bonds or properties with the cost and effectiveness of disintermediated issuance and smart contract automated cap table management, clearing, settlement and trade reconciliation.

Security token offers, or STOES, are not as subversive as ICOs. Initial coin quotations mostly did not represent any underlying property values, but rather promised the value of commodity-like "tools" within their blockchain-based network's economic and incentive model. Crypto-puritans also regret that STOs rely on trusted third parties to stand up for the underlying assets and exist only on government regulator purchases.

But precisely because they could earn the blessing of regulators and the participation of traditional enterprises, STOs were attracting attention on Wall Street. The latest news that Societe Generale tested a STO based on the public Ethereum block has taken this interest to a new level.

STOs can make some of the investment banks' back office functions redundant, but fees for STO market production, risk

The missing piece

But to get to the ideal STO state, another piece of the puzzle is needed: a payment sign.

That's why I see that banks are increasingly offering services and support for the new new breed of sophisticated, reserve-backed stablecoins. Those offered by Gemini, Paxos and the consortium formed by Circle and Coinbase already have much deeper, well-regulated banking relationships than anything Tether could claim. (I see banks prefer these stablecoins over JP Morgan's JPM coin. Why reward a competing bank's technology?)

But that's it. As a deeper beaten ecosystem for a stable ecosystem emerges, it will also provide stability to the market for block-cain native cryptography as bitcoin. Exchanges will have a more reliable, digital source of fiat liquidity.

Finally, they will not even please the client's fiat deposits, ending disasters such as the QuadrigaCX. All of this will contribute to the maturation of crypto baskets in general, enabling their wider adoption as alternatives and competitors to the fiat system.

This gives us a somewhat ironic conclusion for crypto-true believers who torment an end to the centralized banking system and a digital store with non-fiat value: the path to utopia can be paved with bankers and state regulator deals.

Tether token image via Shutterstock



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