{"id":19125,"date":"2024-12-03T11:00:00","date_gmt":"2024-12-03T09:00:00","guid":{"rendered":"https:\/\/forklog.com\/en\/bitcoin-free-banking-from-utopia-to-reality\/"},"modified":"2024-12-03T11:00:00","modified_gmt":"2024-12-03T09:00:00","slug":"bitcoin-free-banking-from-utopia-to-reality","status":"publish","type":"post","link":"https:\/\/u1f987.com\/en\/bitcoin-free-banking-from-utopia-to-reality\/","title":{"rendered":"Bitcoin free banking: from utopia to reality"},"content":{"rendered":"

In Galaxy\u2019s November report<\/a> on Bitcoin layer-2 (L2) solutions, the firm weighed DeFi\u2019s prospects on Bitcoin. Analysts estimate the segment\u2019s TVL<\/span> at $50 billion by 2030 (2.3% of the annual supply of digital gold at today\u2019s price).<\/p>\n

Who will supply liquidity to Bitcoin-based L2s in the coming years, and how? Oleg Cash Coin investigates.<\/p>\n

Bitcoin banking maximalism<\/h2>\n

In December 2010, Hal Finney, the recipient of the first bitcoin transaction, sketched a banking system built on Bitcoin. In a post<\/a> on BitcoinTalk, he cited American economist George Selgin\u2019s The Theory of Free Banking<\/span><\/em>:<\/p>\n

\n

\u201cDifferent banks may have different policies. Some more aggressive, others more conservative. Some will have fractional reserves, others may be 100% backed by bitcoin. Interest rates may vary. And money from some banks may trade at a discount compared to cash from others.\u201d<\/p>\n<\/blockquote>\n

Selgin\u2019s book lays out a theoretical case for a decentralised financial system, free from centralised regulation and state interference. He offers numerous examples from different eras when economies managed without regulatory authorities.<\/p>\n

Finney believed bitcoin could become a reserve asset underpinning banks\u2019 issuance of their own currency. That is the route some of the largest and most influential crypto firms have taken.<\/p>\n

Adam Back and his Liquid Network launched a clearing service for crypto exchanges in 2015. They effectively built a bitcoin-based settlement system, offering one of the earliest banking-style uses of digital gold for inter-exchange clearing.<\/p>\n

Bitcoin and cryptocurrencies have proved well suited to Selgin\u2019s free-banking vision\u2014chiefly because there is no central issuer, no authority setting or policing lending rates.<\/p>\n

Trust in such banks will likely rest on Proof-of-Reserve<\/span> and ZKP technologies. These mechanisms are already used successfully by crypto exchanges, allowing anyone to verify the current state of their assets.<\/p>\n

Turning to a free DeFi market on Bitcoin<\/h2>\n

DeFi\u2019s trajectory on Bitcoin has been signposted by Tether, the issuer of USDT. Formally, stablecoin issuance can be regulated by the state, yet under ordinary conditions the minting and burning of tokens are not supervised by regulators.<\/p>\n

Tether has long accepted bitcoin as collateral for issuing USDT. A case in point is the now-bankrupt Celsius, which pledged<\/a> at least 57,428 BTC in exchange for stablecoins.<\/p>\n

Celsius was ultimately wound down, but Tether did not suffer as a result. The very demand for loans in stablecoins is telling. It implies there will be appetite for similar services in a decentralised format.<\/p>\n

In effect, Tether has already become one of the \u201cfree banks\u201d envisioned by Selgin and Finney: USDT is no longer a speculative instrument but a currency used for payments and settlement worldwide.<\/p>\n

Despite constant criticism, Paolo Ardoino\u2019s company has edged into the heart of the financial system, underscoring the viability of a new DeFi model. Howard Lutnick, a candidate for US commerce secretary and CEO of financial firm Cantor Fitzgerald, is in talks on close co-operation with Tether to launch a lending platform. The idea, outlined<\/a> so far, is a bitcoin-collateralised credit line\u2014initially $2 billion.<\/p>\n

Cantor Fitzgerald is one of roughly two dozen authorised institutions that trade directly with the FRB<\/span> of New York. It is also the custodian of Tether\u2019s US Treasuries<\/a>, which anchor USDT\u2019s dollar peg (about $100 billion\u2019s worth).<\/p>\n

At the end of November, it emerged<\/a> that Cantor Fitzgerald owns 5% of Tether\u2019s equity. In addition, according to Bloomberg<\/a>, Lutnick\u2019s son, Brandon, works as a trader at Cantor and previously interned at Tether\u2019s Swiss unit.<\/p>\n

All this suggests the trend toward crypto-banking and issuance outside the state\u2019s reach may only strengthen.<\/p>\n

How much can bitcoin hold<\/h2>\n

Given the possibilities of fractional-reserve banking, DeFi capacity on Bitcoin could easily exceed the market capitalisation of gold.<\/p>\n

Even rough sums show that synthetic forms of digital gold on Ethereum total around $20 billion across WBTC<\/span>, cbBTC<\/span> and L2 bitcoin. That is already about 17% of the entire DeFi market. Add that Tether held more than 75,000 BTC on its balance sheet at end-September 2024, according to its report<\/a>, and the figure grows further. Add, too, the WBTC locked in contracts\u2014for example, backing DAI.<\/p>\n

Thus, even without \u201clive\u201d L2s on Bitcoin, there is roughly $30 billion of TVL in a quasi-“banking” system built on the first cryptocurrency\u2014by the most superficial estimate, and without decentralised exchanges.<\/p>\n

Nor is it clear how much actually flows through Liquid Network or which institutions shape that market. In a interview<\/a> with Forbes, Back mentioned such \u201chidden\u201d processes. He said the company has already built an accounting system for credit institutions and their clients on Bitcoin; that several US public banks provide capital for such operations; and that there are already \u201chundreds\u201d of individual and corporate clients.<\/p>\n

One of bitcoin\u2019s most prominent institutional backers, Michael Saylor, thinks along similar lines. The MicroStrategy chief noted that big banks such as JPMorgan and Citi could profit by issuing loans collateralised by digital gold. That is not the same as reserving bitcoin, but the direction of travel could prove right.<\/p>\n","protected":false},"excerpt":{"rendered":"

In Galaxy\u2019s November report on Bitcoin layer-2 (L2) solutions, the firm weighed DeFi\u2019s prospects on Bitcoin. Analysts estimate the segment\u2019s TVL at $50 billion by 2030 (2.3% of the annual supply of digital gold at today\u2019s price). Who will supply liquidity to Bitcoin-based L2s in the coming years, and how? Oleg Cash Coin investigates. Bitcoin […]<\/p>\n","protected":false},"author":1,"featured_media":19124,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"select":"","news_style_id":"","cryptorium_level":"","_short_excerpt_text":"","creation_source":"","_metatest_mainpost_news_update":false,"footnotes":""},"categories":[1144],"tags":[18,1093,1156],"class_list":["post-19125","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-longreads","tag-bitcoin","tag-defi","tag-institutional-investors-and-whales"],"aioseo_notices":[],"amp_enabled":true,"views":"25","promo_type":"","layout_type":"","short_excerpt":"","is_update":"","_links":{"self":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts\/19125","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/comments?post=19125"}],"version-history":[{"count":0,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts\/19125\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/media\/19124"}],"wp:attachment":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/media?parent=19125"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/categories?post=19125"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/tags?post=19125"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}