Will All Banks Eventually Hold Bitcoin?

Holding Cryptocurrency on an Exchange

There is nothing as empowering as taking custody of your own wealth. As it applies to bitcoin, custody takes many forms.

In its most simple form, fiat currency is used to purchase bitcoin on an exchange like Kraken, Gemini, FTX, Coinbase or one of the many others.

Many first-time investors will temporarily leave their coins on the exchange of their choice. Exchanges are safe, to a degree, but any significant amount of holdings need more care and effort. Some investors will be uncomfortable with any amount of bitcoin left on exchange for an extended period of time.

Holding Cryptocurrency on a Software Wallet

From the exchange, you could progress to a software wallet solution, where coins are sent off exchange, into a wallet like Exodus, Casa, or Coinbase Wallet.

Software wallets are not all made equal: some, like Casa, have different tiers of account safety like multisig and multi-factor authentication, while others require you to store your 12-word private keys. Although it may not feel advanced, or technical, moving coins off exchange and into a trusted software wallet is a big step.

It shows an added level of ownership and commitment to the proper storage of your wealth. Because bitcoin is an open software protocol, any bitcoin wallet that requires your private keys is equally functional and interoperable at any time.

Upgrading to a Hardware Wallet or Cold Storage

Once you’ve mastered a software wallet, it might be time to consider a cold storage solution: moving your coins off of a software wallet, directly into a “cold” device like Ledger or Trezor.

It’s considered “cold” because these physical devices are not connected to the internet and exist in isolation. From there, your coins are completely safe, but it is your responsibility to appropriately custody the device itself. Most will opt for a small fireproof safe, or a trusted location inside the home.

Holding Cryptocurrency in a Bank

For institutional investors and whales alike, the solutions above may simply not be good enough.

“Deep Cold Storage” is a term that is most appropriately attributed to a London based firm that first offered the custody and security of a bank vault for securing your private keys.

The firm offered traditional financial instruments like insurance on your bitcoin, but also required your full identity to become a client, vetoing any opportunity to transact anonymously on the network. We have introduced a middle-man into a technology whose reason for being is to facilitate peer-to-peer transactions and personal storage of wealth.

‘Not Your Keys, Not Your Coins’

For the bitcoin maximalists among us, voluntarily giving custody of your bitcoin to an institution like a bank may feel antithetical. We’ve all heard the phrase ‘Not your keys, not your coins.’ What they mean is that if your bitcoin is not behind the moat of your 12 word, private key-phrase, then the bitcoin is not truly yours. At least not yet.

In many ways, they have a point. Last month Binance briefly paused all withdrawals of coins off the exchange because of ‘back-logs.’ This is no-bueno. An exchange is necessary to make the markets but pausing withdrawals (however briefly) goes against everything most bitcoiner’s stand for: sovereignty and taking full custody of your own wealth.

Enter: The Banks! 

As bitcoin and the cryptocurrency space enter a phase of possible and plausible regulation, the banks will undoubtedly enter the fold.

But what will they do exactly?

We Don’t Need Them to be Market-Makers 

We don’t need them to buy bitcoin for us, we know how to do that already, and the transactional nature of the latter scenario defeats the entire point of bitcoin. Sure, will Mom & Pop trust their neighborhood banking advisor to find them the best price for bitcoin to add to their generic portfolio? Maybe. Humans are diverse and it’s inevitable that some will.

Although FDIC chair Jelena McWilliams did tell bitcoin magazine that banks could hold bitcoin to ‘facilitate client trading,’ that seems unlikely. It simply isn’t necessary. Banks don’t make the bitcoin markets, nor does the bitcoin community want them to. We already have more exchanges than we can possibly use. We don’t need them to hold small to medium sized amounts of bitcoin for us because, alas, we know how to do that too.

Storage Solutions and Security

The first thing to consider is that many in the sector believe this would be a perfectly fine use of traditional finance in the bitcoin space.

Being your own bank is daunting, there is simply no way around that. It is intimidating to know that the buck stops with you and software, and that you alone are personally responsible for your savings. Some people don’t want to be their own banks! They argue that’s the reason we have banks!

While practical, and understandable, we also need to remember that this idea is baked into financial privilege. Those who come from nations with stable governments and otherwise trustworthy banks will be those heard repeating the ideas above. For those who do not, taking your custody into your own, sovereign hands is incredibly empowering. As Alex Galdtsein writes in his many brilliant pieces for Bitcoin Magazine, bitcoin may be number-go-up technology, but it is also, by its nature, freedom-go-up technology.

What many custody proponents would argue for is that security apparati like the banks would not know, or have access, to your private keys. They would simply offer storage solutions, mainly to high-networth clients, in an effort to put their vaults to work in the era of cryptocurrency.

Going Beyond Custody

We’ve already discussed custody. Clients would pay a premium for the peace of mind and security of storing a percentage of their bitcoin in bank vaults. It will go much further than that though, with bitcoin holdings being used for loan-collateral, for example. The brave (and intelligent) among them may even put bitcoin on their balance sheets! What the FDIC chair and national governments want more broadly, is increased regulation.

‘My goal in this interagency group is to basically provide a path for banks to be able to act as a custodian of these assets, use crypto assets, digital assets as some form of collateral … At some point in time, we’re going to tackle how and under what circumstances banks can hold them on their balance sheet.’

Using traditional banks as a means to leverage your bitcoin assets is a compelling narrative. We currently have several options in the markets that allow us to stake, lend, and borrow against our bitcoin, but the traditional, embedded ‘trust’ factor of major banks may make these pathways feel more accessible to the average user.

The impetus for doing this is simple, and it will be what ultimately pushes all major banks to engage with bitcoin. Clients are demanding these services!

As the industry becomes more mainstream and we onboard the next 100 million diverse users, they will want a diverse marketplace and high-level, streamlined services. The bitcoin incentive is simply too strong.