In February 2014 I wrote a piece about the Mt Gox debacle and announced my participation in the Bitcoin Foundation’s election. Following through on my promise I participated and came in 5th position close after the 3 winners that took the industry seats. Since then, the voice of reason, Jon Matonis has left the foundation and its former director Charlie Shrem has been sentenced to two years in prison. Needless to say, its public appeal has diminished and other actors are attempting to fill the gap. With the recent $5M hack of Bitstamp I feel obliged to once again comment on the state of Bitcoin and underline the importance of sound business practices that are obviously still lacking in the space.
Don’t reinvent fractional reserve banking
Banks get hacked and lose money. We do not hear about these things, exceptions granted, because their dirty laundry is not on the streets. There is no public ledger and transactions are reversible. As a bonus, funds are insured – unless sh*t hits the fan of course. So why would we want to recreate a fractional reserve system in Bitcoin if transactions are not reversible, failure is on full display and insurance companies are not (yet) comfortable backing bitcoin reserves? The simple answer, we should not. The honest answer, because historically it brings home the bacon and some have not yet realised that this new financial system requires us to rethink the business models too.
Cold storage / common wallet mania
There are Bitcoin companies bragging they hold 97% of their funds in cold storage. Hooray, you just made the market illiquid, porting money back and forth between hot and cold wallets. And funds are put together in one big pile which messes with the transaction flow as it moves traffic off-the-blockchain and diffuses the market. It is an anomaly caused by today’s limitations of Bitcoin’s blockchain technology where exchanges require quicker confirmation times to facilitate high frequency trading than it can handle. The good news is that these things are being addressed by competent teams, either solving Bitcoin itself or by creating completely new crypto currencies that take these limitations into account from the get-go.
What does this all mean for Bitcoin?
Lets put the latest number in perspective: Mt Gox lost $409m, Bitstamp $5m. The latter sounds relatively manageable compared to the first amount, but if you think that Bitstamp’s income is generated from a small trading fee and start calculating what impact this must have on their bottom line, it’s not. Even worse, in March 2014 Pantera Capital invested $10m in Bitstamp. That means that in this single hack Bitstamp lost 50% of their investment money, I sure hope they are insured. For the market this once again gives room to the naysayers to bash Bitcoin and potentially delay its adoption. To investors this should signal that we are still in the infrastructure phase of Bitcoin, whether we like it or not. The analogy with the early days of the Internet sticks. No matter how keen we are to move to the app layer in the value chain, we need to get the foundation right.
Safello’s point of view
In line with Satoshi’s vision, we started Safello with the simple idea to not hold clients funds and let consumers be their own bank. We are trying to create global financial freedom here, unhindered movement of funds should be standard, cold storage optional. And, we believed and still believe it is better to acknowledge your limitations than to take unacceptable risk dealing with people’s money. Hence we plan to offer our wallet without storing any funds and will advice customers not to store more than 1 BTC in their web wallet. If these events tell us anything, it is better to be safe than sorry. Of course the community will critique the very notion of a web wallet, but we believe that adoption requires usability. With that said, we will look at best market practises like multi-signature and HD wallets as we progress the product.
Now let’s make sure the remainder of 2015 kicks ass, to infinity and beyond moon people!