A Bitcoin Bank inside the US Financial System

[BB1...]

For discussion purposes.

Introduction:

A Bitcoin reserve community bank lending US dollars to in-market borrowers, funded by Bitcoin time-deposits. Bitcoin depositors receive fixed rate yield financed through loan interest income. Utilizing a Bitcoin futures trading strategy that mirrors market ETFs, the bank’s appreciation risk of Bitcoin will be hedged while eliminating the depreciation risk of Bitcoin to its depositors.

Built on Bitcoin. Carried by credit quality.

Project Overview:

Bank depositors receive non-redeemable certificates of deposit in exchange for their Bitcoin. Bitcoin is exchanged for US$ and converted to commercial loans, match-funding the bank’s assets and liabilities. Underwriting criteria stricter than in-market FDIC insured banks. As loans mature and get paid off, the bank repurchases Bitcoin in the open market and returns its depositors’ Bitcoin with interest. To mitigate the bank’s appreciation risk of Bitcoin, it copies the ProShares Bitcoin Strategy ETF (BITO) by rolling over 30-day CME Bitcoin Futures Contracts. Conversely, if the price of Bitcoin declines in value at the time of loan maturity, the bank diverts the proceeds of the short trade to depositors, eliminating the depreciation risk of their investment through the duration of the transaction.

Thus, depositors would receive a fixed rate yield on their Bitcoin while capturing its future appreciation potential in full, but without experiencing the risk of investment loss—all conditioned on the successful performance of the bank’s commercial loan portfolio.

The bank would primarily keep only Bitcoin and its native token on deposit—never USD.

No FDIC insurance. Reliance on credit quality.

Loans collateralized by grade A commercial real estate no greater than 80% loan to value, and personally guaranteed.

****

Draft Structure of future Certificate of Deposit Token

-3.00% APY
-3-Year Fixed
-Principal protected. Successful performance of commercial loan portfolio eliminates investment risk of depositor.
-Non-redeemable until maturity
-No reliance on trading revenue.
-Commercial loan interest income dependent.

[saxydev]

How can you offer yield for Bitcoin? This is the most false statement most of the "new banking systems" have made for years.

Any service that have offered yield for bitcoin or some other crypto have failed so far. In particular I am remembering about Celsius with their high promises.

[BB1...]

How can you offer yield for Bitcoin?

Bitcoin depositors of this bank would be compensated for the illiquidity of their assets in the same way today's banks pay their deposit customers rates of return on money markets, savings accounts, certificates of deposit, etc.

[saxydev]

Bitcoin depositors of this bank would be compensated for the illiquidity of their assets in the same way today's banks pay their deposit customers rates of return on their money markets, savings accounts, certificates of deposit, etc.

But how? How that can work? Bitcoin has 21 mil. You can offer yield on something that can't ever be more than a specific number!? I mean, I am trying to say it as dumb as possible to find common sense but it's just not possible.
The only way yield can be offered in bitcoin is only on the fees paid by others for some internal transactions, but that's all, or degen gambling on dex's as Celsius again..

[BB1...]

Bitcoin depositors of this bank would be compensated for the illiquidity of their assets in the same way today's banks pay their deposit customers rates of return on their money markets, savings accounts, certificates of deposit, etc.

But how? How that can work?

It could work today the same way it worked before. Instead of gold, we'd use Bitcoin.

https://www.cato.org/blog/what-you-should-know-about-free-banking-history

[saxydev]

Bitcoin depositors of this bank would be compensated for the illiquidity of their assets in the same way today's banks pay their deposit customers rates of return on their money markets, savings accounts, certificates of deposit, etc.

But how? How that can work?

It could work today the same way it worked before. Instead of gold, we'd use Bitcoin.

https://www.cato.org/blog/what-you-should-know-about-free-banking-history

Yes, true that, but gold was never limited. The moment when you did not have gold, just go and take it from the neighbour country which is also mining it, just ransack it lol

[Lida93]

Your project sounds more than true at same time not looking that possible as you have just explicitly explained in letters. Like paying yields to depositors how do make up  for that , next, you said it's going to operate like a traditional bank, if am right then it's going to be under government regulatory policy and bitcoin  as a cryptocurrency is well known for it decentralization and doesn't operates under government regulations like traditional banks does .
So how do your project  deal with this incongruent
 aspect as I see many BTC investors like myself dragging looking at the area I just point out.

[BB1...]

Your project sounds more than true at same time not looking that possible as you have just explicitly explained in letters. Like paying yields to depositors how do make up  for that , next, you said it's going to operate like a traditional bank, if am right then it's going to be under government regulatory policy and bitcoin  as a cryptocurrency is well known for it decentralization and doesn't operates under government regulations like traditional banks does .
So how do your project  deal with this incongruent
 aspect as I see many BTC investors like myself dragging looking at the area I just point out.

Hi Lida,

It could look like this:

100 Million USD worth of BTC Certificates of Deposit
Interest Expense: 3% ($3 Million)

79 Million USD denominated loans with matching durations to Certificates of Deposit
Interest Income: 5% ($3.95 Million)

21 Million (26.5% of loan balances) in USD Certificates of Deposit held as collateral for CME BTC Futures trading account
Interest Income: 4.00% ($840k)*

*When CDs mature, the bank will owe its depositors the original amount of their Bitcoin deposit back (before the Bitcoin was converted to a USD denominated loan asset). If Bitcoin has increased in value, the bank will need to purchase Bitcoin in the open market at a cost higher than it originally sold its depositors' Bitcoin for. To mitigate for this appreciation risk of Bitcoin, the bank will roll over 30 day Bitcoin Futures contracts. The trading costs will be minimal, but the collateral required for the margin loan will be 26%. If Bitcoin decreases in value prior to loan maturity, the bank will need to contribute additional capital to cover the margin call, until the loan is repaid, exchanged for Bitcoin, and returned to depositor in full (albeit at its then depreciated value).

The question I think we need to answer is if this self-custody alternative would appeal to those long Bitcoin (Bitcoiners)?

Regarding regulation, the bank wouldn't hold any $ deposits, only Bitcoin. Therefore, it wouldn't be FDIC insured. If the bank were to become insolvent, the depositors' Bitcoin would be at risk. Its loans could be just as legally enforceable as any other contract between a lender and a borrower in the U.S.

Here's a great interview of George Selgin by Russ Roberts that discusses how a free banking system works in free markets, and why it's better.

https://www.econtalk.org/selgin-on-free-banking/

[Pmalek]

The question I think we need to answer is if this self-custody alternative would appeal to those long Bitcoin (Bitcoiners)?

I seriously doubt it will. It isn't really self-custody either. The moment the bitcoins are in your bank, you become the custodian of them and I lose my control over them. It's only self-custody if I can use my private keys and move my coins whenever I want to, which is surely not the case here. And if you have the means to simply take my coins and not return them to me, it's a custodial and not a non-custodial service.   

[BB1...]

The question I think we need to answer is if this self-custody alternative would appeal to those long Bitcoin (Bitcoiners)?

I seriously doubt it will. It isn't really self-custody either. The moment the bitcoins are in your bank, you become the custodian of them and I lose my control over them. It's only self-custody if I can use my private keys and move my coins whenever I want to, which is surely not the case here. And if you have the means to simply take my coins and not return them to me, it's a custodial and not a non-custodial service.  

My apologies for the confusion.
You are correct. The bank would be the custodian of the Bitcoin. The Bitcoin deposit product would be an alternative to current self-custody options. An option that offers more security, transparency, and stability than anything else available to market participants seeking third-party custodians for their their Bitcoin.


I am reading through Janathan Bier's second book, Reckless: The story of cryptocurrency Interest Rates right now. This guy does awesome work, and I recommend anyone interested in the subject matter consider ordering it. He brought this narrative to market in such detail and before the rest of the publishing industry was able to get their heads wrapped around what happened.

What I'm proposing we build would be very different to what happened with the crypto exchanges and fraudulent lenders in 2022. Here, we can bring Bitcoin into credit markets where its potential has yet to be realized (or even considered).

[BB1...]

Is there a market for this?

Draft Structure of future Certificate of Deposit Token

-3.00% APY
-3-Year Fixed
-Principal protected. Successful performance of commercial loan portfolio eliminates the depositors' risk of investment loss.
-Non-redeemable until maturity
-No reliance on trading revenue.
-Commercial loan interest income dependent.
-Tradable on open exchanges.

[bettercrypto]

If it is operated by a traditional bank, it means that it is under the power of the government of a country. It seems that this topic is mixed with deception for the bitcoin enthusiast.

     Instead of putting my crypto assets or bitcoins in that bank, I would rather put them in decentralized exchange platforms where I am the holder of my private keys and passwords. That can be said if self-custody and not there.

[BB1...]

If it is operated by a traditional bank, it means that it is under the power of the government of a country. It seems that this topic is mixed with deception for the bitcoin enthusiast.

     Instead of putting my crypto assets or bitcoins in that bank, I would rather put them in decentralized exchange platforms where I am the holder of my private keys and passwords. That can be said if self-custody and not there.

Here's how a traditional bank in the US that's FDIC insured operates:

Bank borrows from its depositors the funds it lends to its borrowers. The bank earns a profit by charging a higher rate on its loans than the rate it pays for deposits.
Central Bank acts as a lender of last resort during insolvency, preventing bank runs.
Customers are insured by the FDIC up to 250,000 US$

Here's how what I'm proposing we build will operate:

Bitcoin bank borrows from its depositors the Bitcoin it converts to cash and lends to its borrowers. The bank earns a profit by charging a higher rate on its loans than the rate it pays for deposits.
Loans are match funded with time-deposits of equal duration, preventing bank runs.
Time-deposits are non-redeemable until maturity, tradable on open exchanges.
Not FDIC insured. Deposit repayment dependent on loan repayment. Bitcoin depositors protected from depreciation risk during term of transaction.


I understand your point regarding custody. Yes, what I'm proposing we develop is a non-custodial BTC deposit product. Unlike spot BTC, owners of these certificates of deposit will be assured principal protection (if BTC declines in value, their investment will not) so long as the loan portfolio performs.

[Myleschetty]

If it is operated by a traditional bank, it means that it is under the power of the government of a country. It seems that this topic is mixed with deception for the bitcoin enthusiast.

From what I read, the idea was indeed conny and it was just like traditional bank lending which is possible use to deceive Bitcoiner as you said. The sad thing is that this is one of the major reasons the SEC move its attention more to crypto and they are currently increasing their staff to investigate and prosecute crypto firms.