But is this new record going to convert an often-skeptical financial for Wall Street banks therefore isn't Bitcoin itself but what comes next. But there are rumblings that this “ignore it and it will all go away” attitude could be changing. Goldman Sachs announced in May 2018 that it was opening a Bitcoin. Bitcoin breached $23,000 for the first time in history as more Wall Street names crowd into the world's largest digital currency up 220% this year. As momentum builds, analysts predict more gains ahead.
Agree, this: Bitcoin goes to wall street
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Money Reimagined: Bitcoin’s Tug of War as Wall Street Moves In
Money Reimagined: Bitcoin’s Tug of War as Wall Street Moves In
A tug of war over Bitcoin’s future is becoming more ferocious.
This battle, pitting corporate interests seeking to profit from the Bitcoin system’s disruptive potential against an anti-corporatist dream for a human-first financial system that bypasses institutional middlemen, has been in play for some time. But with bitcoin’s latest price rally, the fight has intensified.
Now, Wall Street’s heavyweights are moving in. And to many who hail from Bitcoin’s “cypherpunk” roots, those guys are the enemy.
The engagement of Fidelity, Citibank, BlackRock and now MassMutual need not be the death knell for a humanist Bitcoin dream. There’s still a pathway to a fairer, more open, inclusive financial model, even with those institutions increasingly investing in and engaging with bitcoin services. But the route to that idealized future is less direct and, inevitably, involves more intense competition.
It’s also not clear whether these competing visions can coexist in the long run. Either way, in the medium term – which may last decades – the tensions will persist and intensify. Who ultimately wins, and how, is what matters.
To be clear, many long-term enthusiasts for bitcoin are cheering the arrival of these big names.
Partly that’s because their participation has boosted the cryptocurrency’s price, which keeps bitcoin HODLers happy. It’s also because these newcomers are finally comprehending the core value proposition for investing in bitcoin as a digitally scarce store of value. That offers vindication for all who’ve been telling this story for the better part of a decade.
But there’s still an inherent conflict between the interests of regulated, compliance-conscious institutions, which will support the imposition of regulations and controls to ease their own participation in it, and those that see such rules and constraints as exclusionary barriers to entry for a wider swath of humanity.
A lightning rod here is KYC and AML, the “know-your-customer” and “anti-money laundering” rules that compel banks to collect identifying records for all their account holders.
This system means everywhere that Bitcoin touches the legacy financial system, which it will increasingly do as more big name companies and financial institutions are drawn to it, there is growing pressure for crypto service providers to impose KYC and, in turn to avoid dealing with others who don’t. (See: the crypto “Travel Rule.”).
The problem is not only that KYC runs counter to the cypherpunk ethos of privacy. As we discussed in a recent Money Reimagined podcast, this requirement can seriously hurt the goals of financial inclusion and innovation.
State-backed stateless money
Raoul Pal, CEO of RealVision and influential global macro investor, found himself in the middle of this fight recently after he tweeted to bitcoiners that KYC is in their interest because it will bring institutional money into the asset and boost its value. As someone with an account bearing the name SexyWebCamPro100x noted in one of more than 700 replies to that remark, the tweet begged for a meme of someone kicking a hornet’s nest.
Pal is an influential thinker about Bitcoin’s place in the future financial system. So we invited him onto this week’s “Money Reimagined” podcast to discuss his brawl with Crypto Twitter. For balance, we also invited CoinDesk columnist Jill Carlson, who, among other roles, is a founder of the Open Money Initiative, which focuses on boosting financial access and economic freedom for underserved communities.
Pal offered a nuanced explanation of his position. He said while his point was partly about allowing both bitcoin HODLers and institutions to “get rich,” it was also that for the Bitcoin system to be a transformative force it needs the “network effect” of more money coming into the space, which in turn requires institution-friendly regulation.
“For people to realize their ambitions that it’s a stateless money … for it to be adopted by people who live within the confines of a sovereign state, unfortunately it will have to be regulated and there’s almost nothing we can do about it,” Pal said.
Some might see a contradiction: for Bitcoin to realize its power as a “stateless” network, the state must exercise more control over it. But Pal’s point is about sequencing. He says we need to first go through a process of official accommodation within the existing system to advance Bitcoin’s journey along “Metcalfe’s Law.” Once it becomes a ubiquitous network, then it is in a position to properly challenge that system.
Indeed, as Carlson pointed out, the positive thing, for those who believe in Bitcoin’s disruptive potential, is that “you’re not going to implement KYC and AML at the protocol level.” Since “there is nothing inherent to Bitcoin that can be regulated, enforced or controlled in that way,“ it can at that level always resist official coercion.
But she also worried that the ever-growing encroachment of compliance requirements on applications built on top of that protocol impedes access to it among marginalized and financially excluded people.
Carlson cited how LocalBitcoins, a peer-to-peer exchange network that was once a “gateway to economic freedom” in places that impose capital controls and other forms of monetary repression, has “increasingly come under scrutiny and has to institute more and more KYC and AML standards and protocols.” She added, “That’s problematic where we are talking about people who don’t have any identity or are unbanked and are refugees and so forth.”
So, where does this go?
Following Pal’s trajectory, we must first see expanded ownership of bitcoin as an asset, during which its price will drive dramatically higher before eventually reaching stability. Only then can it accommodate a broader set of use cases.
One idea is that universal acceptance will then provide network effect benefits to “layer 2” solutions such as Lightning, which could enable lightweight, low-cost transactions for all.
Another is that universal bitcoin acceptance as a store-of-value lets it evolve into a programmable social reserve asset, which then becomes a form of smart, automatically executable collateral upon which innovative new forms of borrowing, lending and insurance are built. In theory, it could replace fiat sovereign assets such as U.S. Treasury notes and bonds as the building block for a global financial system, one that would presumably be more decentralized, with less friction and cost, more innovation and greater accessibility.
But does that mean those seeking positive, humanistic change must just wait their turn? Must they first let Wall Street have its fill? And what guarantee is there that just because it becomes an institutionalized asset it also becomes a tool for payments and financial access?
It’s hard to say. As Pal noted in our podcast interview, “The reality is that what we want [Bitcoin] to be, as individuals, is irrelevant. It’s a network that lives and breathes and does its thing.”
All that’s true. But individuals also have the capacity to organize and, for better or worse, the capacity to lobby governments to introduce rules that influence the evolution of these networked systems.
Which is why this tug of war must continue.
LET’S BE FRANC. The Swiss National Bank’s straightlaced central bankers run a predictable, transparent and generally respected monetary policy. So they might chafe at a comparison to China’s policymakers, who oversee a rather opaque, government-mandated system of capital controls and centralized interest rates. But according to this Bloomberg article, it looks as if Switzerland could earn the same “currency manipulator” label that the U.S. Treasury Department put on China in a politically charged move last year. In theory, the U.S. could consider sanctions if a country is deemed to be using its currency for unfair trade advantages. Switzerland has been actively intervening to hold down the value of the Swiss franc since 2011, when the euro crisis prompted huge inflows of safe haven-seeking money into the country’s economy.
The U.S. would be more within its rights to call Switzerland a currency manipulator than it was with China. (The Treasury Dept. removed the designation from China earlier this year.) Switzerland is explicitly using its money-printing powers to alter the value of its currency with the goal of making its businesses more competitive. China used to do the same thing a decade ago. But at the time of the Treasury designation it was going the other way: intervening to strengthen the yuan against the dollar. Still, you can hardly blame Switzerland from trying to inculcate its relatively small economy from forces outside of its control in the much larger currency zone across its borders.