Hal Finney’s Bitcoin bank idea is alive today through DeFi

Recognising that Bitcoin will never meet up with global demand, in one of his post on Bitcointalk forum, he posted his thoughts, surprisingly it wasn't Layer Two or L2 as many would call it. Finney supported the idea of a Bitcoin Bank.

By · Jul 23, 2020 . 10min read

Photo by Viktor Forgacs on Unsplash

Bitcoin Maximalists do not shy away from any debate that projects Bitcoin to become the Global Reserve currency displacing Dollar which currently holds that status. While some others call it a utopian dream, active research is ongoing for scaling Bitcoin transactions. Solutions like the Lightning Network and Liquid side-chain has been on for years, even the bitter chain-splitting SegWit. A foremost and revered personality in the Bitcoin space once spoke on this issue. Specifically on how Bitcoin banks could exist especially due to scaling problems on the network. This person is someone who the mysterious Satoshi Nakamoto sent the very first Bitcoin he mined?

Not to look so far, the person here is Hal Finney whom many rumour to be Satoshi himself. Finney had a different idea of scaling Bitcoin transactions. Recognising that Bitcoin may never meet up with global demand, in one of his post on Bitcointalk forum, he posted his thoughts, and surprisingly it wasn’t Layer Two or L2 as many would call it. Finney supported the idea of a Bitcoin Bank.

Source: Bitcointalk forum

How does a Bitcoin bank function?

From Finney’s post on the forum, he was clear on how a typical Bitcoin bank would look. While anyone could easily mistake a Bitcoin bank to crypto custody solutions like Coinbase and most recently, now banks in the U.S. offering crypto custody solutions, a Bitcoin bank functions rather differently.

Finney proposed that the banks could issue “their own digital cash currency, redeemable for Bitcoins”. What this means is that Bitcoin becomes the reserve currency backing these bank-issued digital currencies. This is akin to the gold standard operated before Bretton Woods. Crucially, Finney’s system would permit banks to back their cash with Bitcoin, fractionally.

Quite easily, JP Morgan already issues the JPM Coin, which is a digital currency. But instead of backing it with Bitcoin, JP Morgan backs it with the US dollar. This, of course, means we cannot classify this development as a Bitcoin bank in Finney’s view.

Essentially in Finney’s context, no Bitcoin bank can exist in its purest form

Even though Hal Finney’s idea was brilliant, however but seemingly impossible in that 2010 post especially because of scaling issues, many developments have happened within the space since his demise in 2014. One of them is Coinbase Custody launched in 2018. This offers clients access to the secure, institutional-grade offline storage solution. Bitgo and Fidelity Digital Assets by Mike Novogratz are other crypto custodial solutions. These are not “Bitcoin banks” per see, but they bear semblance to what Finney had in mind.

More recently, Grayscale Investments announced the approval of trading of Bitcoin Cash (BCH) and Litecoin (LTC) by FINRA. It also offers Bitcoin Trust on its platform with the GBTC ticker. Bitcoin Trust may sometimes affect BTC spot price especially when GBTC is trading a premium because it derives its from Bitcoin spot price.

DeFi breathes life into Finney’s idea but in another angle

Although Hal Finney’s idea bothers around the possibility of a Bitcoin bank, the dream comes to life when you view it from the lens of decentralized finance otherwise called open finance.

DeFi is booming, we now have the presence of tokenized bitcoins locked in smart contract protocols like Compound. While Finney’s idea may somewhat integrate centralized banks who decides to offer their digital currencies backed with bitcoins, Compound, MakerDAO, etc allows this to happen in a decentralized and more efficient manner. Compound demonstrated this by introducing wrapped bitcoins (WBTC) for its users. WBTC went live on Ethereum at the beginning of 2019. It is an ERC-20 token backed 1:1 with real Bitcoin and is intended to capture the benefits that can result from the tokenization of the Bitcoin cryptocurrency. People can now collateralize their assets and liquidate loan positions with Bitcoins as their base asset. Today, as at this publication, data from Dune Analytics shows 17,709BTC is locked on Ethereum and growing.

Source: Dune Analytics

It’s therefore clear that even though Hal Finney may have thought about Bitcoin bank in a separate perspective, DeFi on Ethereum is making his thoughts possible but in a fully decentralized manner.

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