Banks can now hold crypto – this is the tipping point
The US government has just declared national banks can offer crypto custody services to clients. Here's why this could be crypto's "tipping point".
In the year 2000, Malcolm Gladwell wrote the now world-famous book The Tipping Point: How Little Things Can Make a Big Difference.
In it, he used a series of interesting stories to show how ideas and behaviours spread.
If you’re not familiar with the book, here’s its blurb:
In this brilliant and original book, Malcolm Gladwell explains and analyses the ‘tipping point’, that magic moment when ideas, trends and social behaviour cross a threshold, tip and spread like wildfire. Taking a look behind the surface of many familiar occurrences in our everyday world, Gladwell explains the fascinating social dynamics that cause rapid change.
So the “tipping point” is basically when an idea suddenly goes mainstream. Or “goes viral”, as we’d say today.
To get meta, there was a tipping point a few years ago, when the phrase “going viral” entered the mainstream and “spread like wildfire”.
But back to the topic at hand… we have just hit the tipping point of mainstream crypto adoption.
This week, everything changed. It’s going to take a while for this change to play out. But make no mistake. This is the tipping point.
This is the point where investing in crypto will become as common as investing in stocks, shares and savings accounts.
Well, the US government just declared that national banks can offer crypto custody services to their clients.
In a public letter, dated July 22nd 2020, the Office of the Comptroller of the Currency announced (emphasis mine):
This letter responds to your request regarding the authority of a national bank to provide cryptocurrency custody services for customers. For the reasons discussed below, we conclude a national bank may provide these cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency.
This letter also reaffirms the OCC’s position that national banks may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.
So basically, it’s now legal for US banks to provide crypto custody services to the public.
Why does this matter?
It’s just turned crypto into a mainstream investment that is as safe and easy to store as stocks and cash.
Once the ball gets rolling on this, anyone will be able to walk into their bank and buy, sell, store and trade crypto.
“Being your own bank” is not a good idea for most people
If you’re reading this, you are a very early adopter of crypto. And you likely have the technical skills and knowhow to buy and store your own crypto.
But most people out there aren’t as clued up as you.
At this point in crypto’s development, the mainstream really shouldn’t be holding it. It’s too complicated and too risky.
And I don’t mean risky as in price fluctuations.
I mean risky as in:
- Lose your seed phrase or private key and your crypto is gone forever.
- Get hacked and your crypto is gone forever.
- Leave your crypto on an exchange that gets hacked and your crypto is gone forever.
“Being your own bank” is great for people with the technical knowhow to do it safely. Or for people who live in highly corrupt countries.
But for most people living in stable Western countries, the benefits don’t outweigh the risks.
And even if you’re happy to manage and safeguard all your crypto affairs completely on your own, you’re adding a lot of extra work into your life.
You’re also making a lot of extra decisions that you could avoid if you just let your bank take care of it all.
And if you’re familiar with the concept of decision fatigue, you’ll know that the more things you have to consciously think about every day, the worse your quality of life will become.
From The New York Times back in 2011:
Decision fatigue helps explain why ordinarily sensible people get angry at colleagues and families, splurge on clothes, buy junk food at the supermarket and can’t resist the dealer’s offer to rustproof their new car. No matter how rational and high-minded you try to be, you can’t make decision after decision without paying a biological price. It’s different from ordinary physical fatigue — you’re not consciously aware of being tired — but you’re low on mental energy. The more choices you make throughout the day, the harder each one becomes for your brain, and eventually it looks for shortcuts, usually in either of two very different ways. One shortcut is to become reckless: to act impulsively instead of expending the energy to first think through the consequences. (Sure, tweet that photo! What could go wrong?) The other shortcut is the ultimate energy saver: do nothing. Instead of agonizing over decisions, avoid any choice. Ducking a decision often creates bigger problems in the long run, but for the moment, it eases the mental strain. You start to resist any change, any potentially risky move — like releasing a prisoner who might commit a crime. So the fatigued judge on a parole board takes the easy way out, and the prisoner keeps doing time.
Here’s why crypto hasn’t hit the mainstream
This may sound like I’m railing against the entire ideology of crypto. But I’m actually just highlighting why crypto still hasn’t gained a high level of mainstream adoption yet.
It’s just too much to think about. And it requires learning entirely new concepts and reworking what you thought you knew about old concepts.
Case in point: a wallet.
I remember back when I first heard about Bitcoin, many websites were giving it away for free (in very small quantities).
The catch was, you needed to have a “wallet” in order to receive the free Bitcoin.
I managed to get myself a wallet, write down my “private key” and type my “public key” into the website giving away Bitcoin so it could send some to my “wallet”.
I received about £0.0000000001 worth of Bitcoin. Today worth about £0.000001. But at the time I had no clue what a Bitcoin wallet really was or how it worked. All I knew was that I had one and it was some kind of computer file that stored my Bitcoin.
It wasn’t until years later, after many hours of research, that I really understood the concept of a Bitcoin wallet and how it worked.
In order to do that I had to learn about how the Bitcoin blockchain itself works… and try get my head around many new concepts.
As I’m sure you know, learning all of that is a big commitment.
My point is that right now, if you want to get involved in crypto, you need to spend a large amount of time acquiring knowledge about it. And you need to be highly technically literate.
If crypto is ever to reach true mainstream adoption, it needs to be as easy to invest in and as safe to store as stocks are today.
This is going to make crypto as easy to invest in as stocks
Most mainstream investors don’t have a clue about how the companies they invest in actually work. And they don’t need to.
Ask the average Amazon investor what percentage of Amazon’s revenue it spends on logistics and warehousing… or which computer system it uses to keep track of its orders… or what the total compensation of its directors is and you’ll draw a blank.
They don’t need to know that. All they need to know is that it’s making money, is managed well, and is wiping the floor with its competitors… And that its share price has been on a tear recently.
If they want to invest in it, they just call up their broker, or log into their brokerage account, and buy Amazon shares. Their broker takes care of the rest.
They don’t need to worry about losing their private key and losing all their shares. As long as they can prove their identity, they will always be able to get access to those shares.
They don’t need to worry about their broker getting hacked and losing their shares forever. Brokers are regulated and insured.
And they don’t need to worry about getting hacked themselves. Again, they will usually be reimbursed for any losses so long as they took basic precautions.
Once banks begin offering crypto custody services, the same will be true of investing in crypto.
Anyone will be able to call up their bank, or login to their online account, and buy £500 of Bitcoin.
It will then just appear on their account, along with their other investments.
They won’t need to deal with a “wallet”. They won’t need to copy and paste gibberish “addresses”. And they won’t need to worry about setting the right “gas price” so their transaction actually gets “mined” added to the “blockchain”.
Their bank will do all that behind the scenes.
They won’t need to write down and hide their “private key”. They won’t need to worry about their bank getting hacked and losing their Bitcoin. And they won’t even really need to worry about getting hacked themselves.
Again, their bank will deal with their “private key” and reimburse them if either it or they get hacked.
And they certainly won’t need to worry about how they can pass their Bitcoin onto their loved ones after they die. It will work just like any other investment.
(Estate planning with crypto investments today is an absolute quagmire.)
Doesn’t this go against everything crypto stands for?
That’s not to say storing crypto in your bank is the right path for everyone.
For many people it won’t be. Especially given how Bitcoin was born out of the 2008 Financial crisis and many crypto investors rail against the banks and the corrupt economic system.
But there is no denying that for crypto to really go mainstream, this is what needs to happen. And indeed, what has just happened.
To go back to that tipping point idea, a neat definition of it is this (courtesy of Wikipedia):
A tipping point is a point in time when a group – or many group members – rapidly and dramatically changes its behaviour by widely adopting a previously rare practice.
In this case, this could be both a tipping point for the banks, and for their customers.
There are currently very few trusted crypto custody services around the world. Even Grayscale, which at last count has over 1% of the entire Ethereum supply in its Ethereum investment fund, relies on Coinbase for custody. And so do a number of other funds.
Once big traditional banks start offering their own custody services, we could see a rush to capture the market. That’s going to mean a lot of crypto trading going on behind the scenes, and likely some big price movements, too.
What’s in it for the banks?
But why would the banks even bother offering crypto services. Just because they can, doesn’t mean they will, right?
Well, just like Coinbase, they will charge fees to store your crypto for you.
I’m sure at first these fees will be comically high – just like the premium on Grayscale’s funds – but over time and as competition increases, those fees will reach a reasonable level.
Would you be willing to pay 15% a year for your bank to secure your crypto for you? Probably not. But if the fee were only 0.5%, maybe that would be worth it… for all the reasons I mentioned earlier.
And if the banks are profiting by their customers holding crypto, it will be in their interests to promote it. And banks are experts when it comes to marketing new money products.
As one Redditor succinctly put it:
Staking crypto is going to get very interesting
The area of crypto that could benefit the most from this change is Proof of Stake (POS) cryptos like Tezos and (at some point next year) Ethereum.
Unlike Bitcoin, which is Proof of Work, POS cryptos reward you just for holding, or rather “staking”, them.
To get your reward, you must “stake” your crypto, which secures its network. And in exchange for securing its network, you get a share of the network transaction fees.
However, staking isn’t all that straightforward. And it does come with some risks and rules if you do it yourself.
For example, in order to stake Ethereum yourself, It’s likely you’ll need to own at least 32 Ethereum, which would run you around £7,000 at today’s prices.
However, services like Coinbase will let you stake any amount… for a fee.
Case in point: Tezos staking on Coinbase.
Coinbase listed Tezos and offered Tezos staking to its customers in November 2019. In the months since, Tezos has been one of the best performers in the market.
For example, Year to Date, Tezos is up 130% while Bitcoin is “only” up 33%.
Of course, it would be overly simplistic to assign all that growth to staking on Coinbase. But it has certainly played a part.
And if the banks start offering staking services on top of custody services (which, let’s be honest, is inevitable) then it could push a lot of interest into staking cryptos.
Especially big name cryptos that will be difficult to stake on your own, like Ethereum.
So if this really does prove to be the tipping point, it’s going to be a very interesting few years for all of crypto.
Okay, that’s all for today.
If you thought this week’s issue was worth a pot of tea, you can buy me one here.
Thanks for reading.
Subscribe for exclusive content
The best newsletter in crypto, or your money back (it's free).