As the Bitcoin Foundation fails, banks wake up

I’ve blogged before about how bitcoin will become institutionalised, that you cannot have money without government, why it needs a Foundation and how a Wild West structure for value exchange will fail.  It’s certainly moving in that direction after the latest revelations about the Bitcoin Foundation, alongside the equally revealing announcements that banks are incorporating the blockchain.  Here’s the latest.

There were lots of news and media sites covering the revealing post made by new Bitcoin Foundation Board Member Olivier Janssens over the weekend.  Janssens was elected to the Foundation just over a month ago and, on Saturday, posted an update on Reddit: The Truth About The Bitcoin Foundation .

It’s pretty revealing.

First of all, the Bitcoin Foundation is effectively bankrupt and The lesson for all of us in Bitcoin is to never put any trust in a centralized org again that wanted to represent Bitcoin.

Urm.  I’m not sure that’s the lesson Olivier.  I think the lesson is don’t give your money away to something that has no regulation, no guarantees and no transparency.  Anyways, the fallout has been pretty interesting.  A few comments on the Reddit post include:

I think it is going to keep coming back to: who manages the funds? [coinaday]

Shh guys - don't you all realise "blockchain technology" is just the terminology we are using so that we can get bitcoin into banks and big businesses through the back door? [bitcoind3]

And

The truth is that money turns everything into shit. Centralization and money even more so. [lightrider44]

In fact, most of the community believe that decentralised control of everything solves everything.  It’s an interesting idea.  Today, the 1% control everything and the 99% revolt.  Tomorrow, if the 99% control everything, then what happens to the 1%?  Most likely they find a way to create a new control mechanism and retain their 1% privilege.   It’s an interesting battle.

But the real issue with the Bitcoin Foundation turns out to be the centralisation of focus and then the use of that focus.  As I mentioned in my blog last year:

Why is the Bitcoin Foundation smeared with controversy?  There has been extensive critique of the Bitcoin Foundation and its leadership, such as the discussion yesterday, of their involvement in the Mt.Gox failure.  Former vice-chairman of the Bitcoin Foundation, Charlie Shrem, faces federal money laundering charges for his role in assisting agents of the infamous online drug marketplace Silk Road.  Executive chairman Peter Vessenes' relationship to former board member Mark Karpeles, the disgraced CEO of bitcoin exchange Mt. Gox, has been highlighted as inappropriate. In fact, the Bitcoin community in general is divided over the role of the Bitcoin Foundation as a community or industry representative. 

Certainly the Bitcoin Foundation were close to Mt.Gox, and it really doesn’t help when the organisation created to promote and support Bitcoin’s developments is accused of being corrupt.  In fact, between the multiple failures of exchanges in bitcoin and now their organisation created to promote their cause, it begs us to ask: what will happen to bitcoin now?

The answer: not much,  as you have to bear in mind that the Bitcoin Foundation and Mt.Gox are not bitcoin, but operators around the markets of bitcoin.  It would be like saying that because the US tourism agency and Washington Mutual fail, that the US dollar would disappear.  They are not the same things, and bitcoin will continue to develop regardless of these headlines.

Meanwhile, some have pointed out that the failure of the Foundation may be more to do with being unlucky or stupid, than anything else.  After all, the Bitcoin Foundation had $4.7 million of net assets at the end of 2013, but these were mainly in the form of bitcoins valued at $900 each.  A year later, the value of bitcoin had tanked to $250 each, wiping out almost 75% of the value of their asset base.  Meanwhile, expenses were around $1.47 million whilst revenues were less than one million.  In other words, the Bitcoin Foundation was created during a rapid growth in the value of bitcoins and did not know how to handle the rapid loss of bitcoin value, whilst trying to sustain their operation.  That created a challenge as to how to keep going and is the reason why many people have stepped down or been let go (including our friend Jon Matonis).

Anyway, before I move on my favourite comment about all of this came from John Barrett on Cryptocoin News:

This is why you need a regulatory structure folks.  

The 99% will claim that with democratised transparency they can manage everything but, without structure and control, you have anarchy and abuse.  Imagine Alibaba or eBay without a central exchange to manage disputes and that's what the 99% are lobbying to achieve.  They believe the multisig structure to arbitrate disputes will provide the appropriate controls, but I am not so sure.  In fact, these developments - Mt.Gox and the Bitcoin Foundation - demonstrate more about why you need independent governance to make monetary systems work as, without it, you have a complete mess.

Talking of which, banks have become far more vocal and articulate about bitcoin or, rather, the blockchain of recent days.  In January, USAA, NYSE and BBVA invested in these technologies ($75m in Coinbase), with two quotes catching my eye:

“At its core, Bitcoin is a decentralized protocol that enables exchange of value among parties around the world, giving it the potential to alter the financial services landscape,” Jay Reinemann, BBVA Ventures executive director; and

The Bitcoin blockchain “is an opportunity for Wall Street to streamline some operations that are pretty antiquated”, Duncan Niederauer, former CEO of NYSE Euronext 

It’s not surprising that these statements are being made when even the regulator gets it:

“The price of handling bits [of data] has come down by a factor of 10,000 fold over the last generation; it’s high time that the costs of payments processing fall by a factor of even two.  Bitcoin offers the prospect of necessary and important disruption in finance for the benefit of buyers and sellers rather than financiers and middlemen.”  Lawrence H. Summers, former U.S. Treasury Secretary

Maybe the latter quote is the reason why the US Fed is creating their own cryptocurrency with IBM.

All in all, we are seeing the natural development of order in the cryptocurrency community where the unregulated markets of exchange (Mt.Gox) go through a trough of disillusionment as even their leadership cannot function effectively (the Bitcoin Foundation), whilst the traditional order things (governments) wake up to see how they can make this work effectively (via the banking system).

Watch our weekly interviews closely as we’ll have more on this coming up soon.