In Bitcoin, Financial Institutions are Just Another Node on the Network

By Kyle Torpey Nov 20, 2015 12:15 PM EST

Although the big banks have changed their tune on Bitcoin’s blockchain technology over the past year, it still seems clear that nearly none of them want anything to do with bitcoin (the currency). Whether it’s due to the perceived connection to criminal activity or the desire to have complete control over any newly-implemented ledger system, some of the largest financial institutions in the world seem hesitant to embrace Bitcoin as an open platform for transferring value.

The topic of why banks may be dismissive of Bitcoin was discussed at a recent BitPanel Meetup featuring Blockchain Capital Managing Partner Brock Pierce, Yang Ventures Founder Terrence Yang, and Coinsilium’s Pierre Wolff.

Read More: Bitcoin vs Blockchain: Barry Silbert Weighs-in at Inside Bitcoins NYC

Why Choose Bitcoin Over Permissioned Ledgers?

During the discussion in which Bitcoin’s decentralized ledger was compared with private, permissioned blockchains, the panel was asked what the reason would be to use Bitcoin in the first place. Brock Pierce noted that use of the Bitcoin blockchain makes the most sense in situations where one’s counterparty is not trusted, which may be why banks have a low level of interest in the technology:

“The reason why [the Bitcoin blockchain] is used — it’s where you don’t have to trust your counterparty is the primary reason. In the case of the large financial institutions, they know their counterparties well enough — in most instances can trust them well enough — that a lot of them are going to use permissioned ledgers [or] private blockchains, and that’s because it’s a closed network.”

The one benefit of using Bitcoin for banks pointed out by Pierce after his initial comments was that it could make sense for these financial institutions to essentially outsource the work required to develop a new ledger system to the Bitcoin development community. He added, “It’s crowdsourcing your infrastructure.”

Financial Institutions Don’t Get Special Privileges

Pierre Wolff also shared his thoughts on the usefulness of the Bitcoin blockchain for banks, and he pointed out one issue banks may see with a decentralized, permissionless ledger is that they don’t have any special rights or privileges in such a system:

“Dont forget that when Bitcoin was invented . . . it never had this thing that said, ‘Oh, and financial institutions have this special role. You know? In Bitcoin world, financial institutions are just a node on the network, just like everybody else. They’re not accustomed to working that way.”

It should be noted that there are still plenty of useful services that financial institutions can provide while operating as “just another node” on the Bitcoin network. Coinbase, Circle, and many of the Bitcoin exchanges are perfect examples of this sort of activity.

Uncertainties Remain with Bitcoin

There are a variety of uncertainties associated with Bitcoin that banks are not ready to deal with at this time. According to Wolff, one possible issue is that banks have to trust a new group to handle settlement, bitcoin miners:

“You can’t tell a financial institution that, ‘Hey. You can outsource your validation and settlement to this world of nodes of people that may or may not put your transaction in a block this time.’ These are uncertainties that I think financial institutions are very nervous about — entrusting others to make sure settlement takes place.”

Technically, a miner could be a pseudonymous individual or entity who does not wish to make their true identity public, which could be an issue in the eyes of financial institutions. The large number of scandals in the Bitcoin industry have also been a problem, which is the main reason some people only talk about the blockchain — even when they plan to use Bitcoin’s blockchain.

Read More: Bitcoin’s Scandals Won’t Matter If It Has Killer Apps

Featured image taken from Bitnodes.


Kyle Torpey is a freelance journalist who has been following Bitcoin since 2011. His work has been featured on VICE Motherboard, Business Insider, RT’s Keiser Report, and many other media outlets. You can follow @kyletorpey on Twitter.

  • Milly Bitcoin

    I don’t know all their positions but I can bet they are not just too stupid to understand things as many Bitcoiners will portray.

  • Edward V2.0

    Care to enlighten them?

  • Milly Bitcoin

    You don’t understand the reasons banks don’t like Bitcoin because you don’t take the time to understand their position. You are too busy making fun of them and claiming you know more than they do.

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