Bitcoin Or Bust: Taking British Banking Out Of Exchanges

Despite the UK government’s pro-blockchain stance, commercial banks have put a dozen or more bitcoin exchanges out of business by denying or withdrawing facilities. Without a fundamental change in approach, the banking sector will hamstring progress in this ‘bleeding-edge’ sector of fintech, forcing cryptocurrency entrepreneurs to work outside of the national banking system in the process.

Of course bitcoin is perfectly legal in the UK although unregulated, but the hub of the matter centres on the banks’ attitude to the cryptocurrency in this country and that they “won’t play nice”. That is according to one crypto protagonist I spoke to at the recently held Blockchain Expo London event late this January.

And, so it would appear given recent history in the sector with a host of exchanges having hit the buffers and gone out of business – all despite the British government’s approach to blockchain.

Just take the following email message issued by Cryptopay, a bitcoin brokerage. It will barely have come as a surprise to the majority of Cryptopay’s British customers, especially those who have been active in the bitcoin world for more than a few months.

“I regret to inform you that starting from 1st February, British Pound deposits and withdrawals are no longer supported by Cryptopay due to updated bank policies.”

It’s a message that has been repeated time and time again ever since bitcoin first gained a measure of popularity in the UK, and with it, the need to exchange the digital currency for Sterling (GBP).

Cryptopay allows people to buy and sell bitcoin easily. Not so easily any more, however. Cancellation of GBP deposit and withdrawal facilities means they are limited to SEPA (Single Euro Payments Area) transfers, making the service all but useless to most British customers.

Neither is Cryptopay alone. Over the past three or four years, perhaps a dozen or more UK bitcoin exchanges and brokerages have launched and floundered as their banking facilities were withdrawn. They ended up with either awkward workarounds or sinking entirely.

(Image: Shutterstock).

Indeed, in 2015 around eleven bitcoin firms across the globe were reported and profiled by Coindesk to have been shuttered for various reasons including heightened competition and insufficient cash. According to another source (bravenewcoin.com) reporting in late October 2015 “at the very least 36 bitcoin exchanges” had folded.

Britcoin, later to be re-branded Intersango, launched in 2011. Before it ultimately shut down for good, it had repeated problems with UK bank transfers, detailed in one of its updates from August 2012 (their site is now defunct) that read as follows.

“Bridging the gap between the conventional banking system and bitcoin is a challenging and expensive task. We have had many issues dealing with the conventional banking system; missing transfers, crippling technical issues, accounts frozen without warning, and even accounts closed without warning.”

Later, in early 2014 Bit121 launched when bitcoin was emerging into the light. The same happened. After a promising start, banking facilities were withdrawn and the exchange was no longer able to function.

Another outfit, ‘In Bitcoin We Trust’ (ibwt.co.uk), suffered the same problem. For a while, as they tried to cling on by their fingernails, they resorted to using postal orders, of all things.

Coinfloor, currently one of the only UK exchanges in operation, uses international SWIFT transfers, which incur a significant cost and delay; as a result, the minimum transfer in is £1,000 (c.$1,250).

UK Peer-to-Peer Services

Instead of traditional exchanges, the UK has a series of peer-to-peer services that match individual buyers and sellers. Sellers are typically trusted individuals, where trust is established by feedback and reputation.

They work by pairing a buyer and seller for a specific amount of bitcoin. Once the buyer has paid – typically with a bank transfer – the seller sends the bitcoins. It gets around the problem of centralized organizations that can be shut down by the bank.

However, the anxiety that pervades bitcoin businesses in the UK is evident here too. On at least one popular site, buyers are instructed never to include ‘bitcoin’ in the payment reference, on pain of being permanently banned from using the service.

UK versus Other Nations

So what’s the picture in other jurisdictions around the globe. Well, Russia has just relaxed its regulatory stance and adopted a ‘wait-and-see’ approach, which has effectively legalized bitcoin and made it possible to open exchanges there.

Other countries are much more progressive. Switzerland, for example,  has made it very easy to buy bitcoins through a large network of ATMs on their rail system, and recently in the town of Zug a system was trialled for paying bills using bitcoin.

The same in Japan, where it’s possible to pay electricity bills with bitcoin. America has a more complicated regulatory framework, but things are becoming much clearer since the BitLicense was implemented in 2015. Many states are now following New York’s approach.

China is also clarifying its position somewhat. Bitcoin is legal there, but they appear to be taking a ‘caveat emptor’ approach. The People’s Bank of China recently met with a number of big Chinese exchanges, after which they stopped the highly leveraged trading for which these exchanges are well known. Much of the volume was believed to be fake as they had zero-trading fees.

Fintech versus Banks

You could understand why banks might once have been reluctant to deal with transactions from bitcoin exchanges.

A few years ago, bitcoin was best known to the public as the means by which drugs could be bought on the Internet’s dark markets – chiefly the Silk Road, which was raided by the FBI in October 2013. Its borderless and quasi-anonymous nature meant that it could also be a useful vehicle for money laundering.

But that was then and this is now. Bitcoin has come a long way since the days of the Silk Road, and there is a fast-growing segment of the fintech industry that makes use of both bitcoin itself and the wider blockchain technology that it pioneers.

The mismatch between government and the banking sector may also appear as odd. The UK government is vocally pro-blockchain research and development, as last year’s ‘Distributed Ledger Technology: Beyond block chain’ (Jan 2016) report and the activity around it unequivocally demonstrate.

Some say we are in a bizarre situation where the British government claims we are open for business, but the banking sector stands threateningly in the doorway.

Remember too that these are not distinct entities. Since the financial crisis the taxpayer has been a majority shareholder in Royal Bank of Scotland (RBS), the bank that fell hardest and required the largest bailout. That stake stands at some 82%, and at the time of writing there is no immediate appetite to reduce it. RBS simply isn’t ready yet. That ought to form an important piece of leverage.

Britain has a reputation for being a fintech hub with London at its beating heart, and aspires to blaze a trail in the promising new world of blockchain application. The banking sector has evidently taken exception to that.

It probably does not help matters that, right at this moment, UK banks are facing another existential threat: the reality that, out of the European Union (EU), London could lose its status as a global financial hub. Several have already taken the decision or are seriously considering moving their headquarters out of The City.

But whether for fear of competition, over-caution around fraud and money-laundering, or simply a laziness to change course regarding something that was once primarily associated with drug purchases, they seem to have closed ranks and apparently taken the collective decision not to work with bitcoin-related businesses.

Closing The Loop

Fiat money, created and curated by banks, is inherently centralized. The central bank creates central bank money, which includes physical coins and notes as well as the electronic central bank reserves that are written into existence in Quantitative Easing.

Commercial banks create the majority of the money supply, by lending money into being – not, as is popularly believed, by lending out customer deposits – even under a fractional reserve system.

This centralization of seigniorage – derived from Old French ‘seigneuriage’ (right of the lord (seigneur) to mint money) –  and of the payments system is diametrically opposed to bitcoin’s decentralized money creation and complete freedom over payments. The nature of bitcoin is that transactions cannot be reversed or blocked, since there is no intermediary to carry out a transfer on your behalf – as regular payment processors do.

Perhaps it’s no wonder the two systems don’t interface well – they are the financial equivalent of oil and water. And, addressing this problem without the assistance of the banking sector is not straightforward.

Money cannot easily flow from the blockchain economy into the traditional financial sector and vice versa without that co-operation.

Ideally this would not be necessary: money would circulate within the bitcoin economy as bitcoins. Goods and services would be paid for in bitcoin and the recipients would themselves spend those bitcoins. In reality, of course, this doesn’t happen. The sector is not large enough to offer all the goods and services required to make bitcoin a broad enough means of payment.

Moreover, bitcoin’s volatility means it’s not really suited as a unit of account or store of value. It’s a great medium of transfer, but its price against fiat fluctuates too much for most people’s comfort.

This can make for something of a chicken and egg situation. The bitcoin economy won’t expand until bitcoin is more suited as a means of payment; it won’t be better suited without greater growth and stability. But if it’s not possible to close the loop of the bitcoin/blockchain economy in this way, perhaps it’s possible to expand it.

Fiat On The Blockchain

‘Real’ money – the fiat pounds Sterling (GBP) issued by central and commercial banks – is not going out of fashion any time soon. It has problems. In some cases some say it’s barely fit for purpose. But we need it, because being as it is issued by banks and governments, that’s how we pay for our mortgages, taxes, loans and much else besides. And, with the help of the right blockchain it could be improved with relatively little effort.

Now if we take as an example Waves, a custom blockchain-powered tokens platform that raised over $16m last summer through crowdfunding, it makes it easy to create your own crypto tokens, which can be used to represent whatever you want. These can be sent anywhere, almost instantly, thanks to the borderless and efficient nature of the blockchain.

Making Waves

Key to Waves’ overall strategy is creating fiat-backed blockchain tokens. Here the idea is that a trusted organization – a bank or other financial institution of some kind – will act as a gateway between the fiat world and that of the blockchain.

In practice, this involves holding fiat money in a fully insured, audited account and issuing tokens representing each unit of it on the Waves blockchain. Customers pay money into the gateway using a bank transfer or other suitable means, and the gateway issues them with the same sum in blockchain tokens. For example, £1,000 is added to their account, and they send 1,000 wavesGBP to the customer.

The same exchange happens in reverse when customers want to cash out their wavesGBP and have them sent as ‘real’ GBP (Sterling) to their bank account. Each gateway is responsible for compliance in their jurisdiction. Waves is essentially the toolkit.

This naturally raises the same issue that exchanges have: if the UK’s banks are anti-bitcoin and anti-blockchain money more generally, how do you get them to co-operate by letting organizations issue GBP tokens in the first place?

In practice, this step can be dealt with in much the same way as the exchanges do it – by using foreign banking facilities and moving money around using SEPA or SWIFT transfers. Yes, the costs are the same, but that may not matter so much as it does for bitcoin, because the result is something very different.

Making Money More Efficient

Sasha Ivanov, the Ukrainian CEO and founder of Waves, commenting said: “Waves isn’t trying to replace existing money. We already have money – US dollar (USD), Sterling (GBP), Chinese Yuan (CNY), Euro (EUR). Bitcoin is money too. But we do think we can make money more efficient.” Waves is built on the Scorex platform, which is itself based on Scala I, with Bitcoin and its clones being C++ as well as Java being occasionally used.

He added: “By putting fiat money on the blockchain we can make it faster and more transparent and we can reduce costs and times for sending it abroad. By doing so we can introduce competition and encourage the banks to be more accountable.”

A graduate in Theoretical Physics from Moscow State University, Ivanov opined further: “If the banking sector in one country won’t work with us, we will work with banks in another jurisdiction. The nature of the internet, open source software more generally and blockchains specifically is that they are not confined geographically.”

So, if one organization won’t work with them another will. Ultimately, according to the Ukrainian “there is nothing to lose by embracing this technology, and much to gain.”

Frictionless Fiat

The problem with bitcoin exchanges is the costs involved in moving money into and out of them, and the fact that this is probably a regular requirement for customers.

If you are paid in bitcoin, you will likely want to cash it out to pay bills and buy things. The difference with wavesGBP is that once the money is on the blockchain, it can be used as money – including as a store of value.

There is not such an immediate pressure to cash it out into real GBP, incurring the costs of exchange and transfer involved in the traditional financial system. It can be sent anywhere in the world, almost instantly and at practically zero cost. Furthermore, it can also be used to invest in crowdfunds, which will be one of the Waves platform’s chief purposes.

Critically, it will be possible to exchange funds quickly and easily on the built-in decentralized exchange (DEX). And, wavesGBP could be exchanged for wavesUSD or wavesGOLD with minimal cost. One could even exchange it for bitcoin (wavesBTC) and withdraw it via a bitcoin gateway – which is, in fact, the first gateway to be created on Waves.

Now, if you need to cash it out and pay your mortgage, for example, you’ll run into the same issues and will incur the gateway’s costs. But making blockchain-based money a lot more like fiat money means that storing your tokens doesn’t come with the same problems of them fluctuating in value.

Tokens can circulate in the blockchain economy more readily and usefully, without being converted back to fiat. This is because they are essentially already a form of turbocharged, blockchain-powered fiat.

WavesGBP’s value is just the same as the Pounds (GBP) in your bank account, but this money can do things that bank-issued money cannot. At that point, expanding the blockchain economy starts to make more sense, because you can build network effect now that businesses and consumers do not have to worry about their money holding its value from day to day.

This does not entirely solve the problems of the UK banking sector’s hostile attitude towards bitcoin and cryptocurrencies, but it does suggest that the roadblocks they throw up will not be insurmountable. It’s just that the answer will be to work around them rather than with them.