It’s been a long journey for Alan Lane since the Silvergate Bank CEO bought his first bitcoin in 2013.
That was around the time his small, deposit-hungry bank, based in La Jolla, California, took on its first crypto exchange as a client. It was a gutsy move for a financial institution, since at the time most bankers viewed bitcoin as either a fad, a scam or a reputational and regulatory risk – if they had even heard of it all.
Speaking Friday at the BlockFS conference in New York, Lane recalled:
“Here were these companies that were raising money from reputable [venture capital] firms. They weren’t doing anything illegal, they weren’t doing anything immoral. And yet, they were struggling to maintain bank accounts. So I put our need for deposits together with their need for banking services.”
Five years later, Silvergate is arguably the leading bank for crypto startups in the U.S. Prominent exchange clients include Coinbase, Gemini, Kraken, and bitFlyer. And as revealed in the bank’s initial public offering prospectus, filed earlier this month, the bank now works with 483 crypto startups that contributed roughly $1.7 billion in deposits to the balance sheet as of Q3 2018.
To overcome the crypto-phobia that to this day has held back most of Silvergate’s peers from serving the sector, Silvergate invited exchange executives to meet directly with the bank’s regulators, Lane said during a panel discussion on banking bitcoin startups.
Even in the early days, he said, he was only interested in working with startups that had professionals with legal expertise from the traditional financial world and were wholly dedicated to the nitty-gritty of daily monitoring for ironclad compliance.
At the time, most crypto startups in those days had executives juggling diverse responsibilities, which was not going to cut it for a bank or its regulators. “The chief compliance officer is not a multiple-hat type of person,” Lane said.
The Coinbase Club
During the same panel, Nick Rosenberg, director of IT at the Metropolitan Bank in New York, said his institution –– one of the very few to compete with Silvergate in the space –– is aggressively pursuing a diverse range of crypto startups.
But Lane said Silvergate has narrowed its focus over the years to almost exclusively serve exchanges, over-the-counter trading desks, and institutional investors.
In reference to both Silvergate and Metro sharing Coinbase as a mutual client, Lane said:
“Coinbase is probably the most well-banked company in the ecosystem. Coinbase probably banks with us and every other bank doing this on purpose.”
Lane said this may be the remnant of a popular strategy from the early days, when crypto companies developed relationships with multiple banks in case one gets shut down.
To distinguish itself from a client’s other banks, Silvergate integrates with exchange platforms’ APIs so that institutional investors with Silvergate accounts can instantly make trades or deposits 24/7, even if the bank is closed.
This also offers some peace of mind for those investors that they’ll be able to get their money out, in fiat form, in a hurry.
“That’s equally powerful on the way out, on the off-ramp,” Lane said. “Because we’ve all heard of exchanges being hacked.”
The availability of data from a public ledger has helped Silvergate to get comfortable serving a sector long associated in the public mind, rightly or wrongly, with nefarious activities.
In the early days, Silvergate set up a process for ongoing monitoring that matched up deposits with bitcoin blockchain data. Up until today, Lane said his staff might make quarterly visits to exchange offices to make sure they have the most up-to-date monitoring tools across blockchain-based assets, in addition to daily monitoring and routine communications.
“We wanted to be able to see both sides of that [bitcoin] transaction,” Lane said. “When you wire $50,000, send us the blockchain address…what we want to see on the blockchain is a transaction that matches up with that $50,000 value.”
Silvergate often applies the same meticulous approach in requiring its clients’ use external auditors for assets like dollar-pegged stablecoins – which Gemini and Coinbase have both launched in this year – to make sure fiat deposits match up with exchange records.
Although Lane said he originally scoffed at the phenomenon of cryptocurrencies designed to hold their value with fiat, his bank is now “looking into stablecoins” to learn more.
Speaking to why Silvergate is slow and selective when onboarding new crypto clients, he concluded:
“It’s really important that it’s done right because if we have something illegal that goes across our platform, it could be detrimental to our business and to the integrity of the system. So we’re very protective of what we built.”
Alan Lane (right) speaking at Block FS image via CoinDesk
The Satoshi Revolution: A Revolution of Rising Expectations
Section 5: Saving the World Through Anarchism
Chapter 11, Part 7
Crypto Justice: Don’t Smash the State, Bypass the State.
The 19th century individualist-anarchist Benjamin Tucker referred to anarchism as “society by contract.” The contracts could express any exchange, from leases to prostitution, from insurance policies to drug deals. The contracts would not be legal or illegal, only consensual. Just as crypto bypasses central banking and decentralizes economic control down to the individual, smart contracts have the potential of bypassing much of the legal system and returning to the people’s law—contract law. But, like crypto, the contracts would not require a trusted third party.
– Wendy McElroy, “How the Blockchain Provides Private Justice”
Last week’s installment of The Satoshi Revolution was entitled “How the Blockchain Provides Private Justice.” It examined a key argument used to counter the possibility of libertarian or private law. In summary: for justice to function, the content and administration of justice needs to be widely accepted, and that acceptance is based on the system being considered legitimate. The legitimacy is deemed to rest on consensus—on the judgment arrived at by most of those concerned–not on individual choice. This means the administration of justice must be centralized and homogenized by an agency that enjoys consensus because such an agency enjoys the compliance, if not the respect, of society. The preceding dynamic requires the state. When neither obedience nor respect are present, then the justice system commands compliance through the institutionalized violence of law enforcement.
The Parallels of Crypto and Justice
The argument for fiat and against crypto is remarkably similar. In order to function, it is claimed, a currency needs to be widely accepted, and this happens only when the public views it as legitimate. A consensus is necessary. The logic: a currency must be issued by an agency that enjoys public support and can command compliance in the form of acceptance. If the “consensus currency” is not used voluntarily or if it suffers from competition, then its use can be compelled by institutionalized force, such as legal tender laws. Again, this requires the state.
This line of reasoning is invalid for currency; it is invalid for justice. Crypto proved that individual consent coupled with an instrument of administration—the blockchain—can create a currency that others accept. The currency needs only the consent of users, not a broader consensus, and compliance with the blockchain is an automatic matter.
The consensus argument for both currency and justice is more than invalid, however. It is deeply dishonest. For one thing, it is a contradiction in terms. If the administration and acceptance of a “service” relies upon force, then the service is not widely viewed as legitimate; it is widely opposed.
The argument also contains several sleights of hand or sleights of concept. One is how consent and consensus are presented. Consent is equated with legitimacy. This sounds reasonable because, on a personal level, it is. Consent and legitimacy are cause and effect when discussing a person’s willingness to engage in an exchange; a marriage becomes legitimate by saying “I do.” But the legitimacy argument takes a sharp turn when it introduces consensus. At this point, legitimacy is no longer based on individual consent but upon a collective agreement in which individual consent is democratized; the majority wins. The individual loses. As the political satirist P.J. O’Rourke stated “bipartisan consensus. Those are the two most frightening words in Washington. Bipartisan consensus is like when my doctor and my lawyer agree with my wife that I need help.”
The consensus argument rests on geography. Because communities are geographically defined, it is assumed that geographically-homogeneous laws must exist, and they are usually established by some form of majority rule. Binding elections result in politicians—that is, people empowered by consensus—who pass laws that apply to every individual, for example, whether the individual consents or not.
What happens when geography does not define a community and its institutions? Crypto answered this question in at least one area: currency. Money is no longer restricted to the fiat issued by jurisdictions, which flows through the physical choke points called banks. Crypto decentralizes currency and bypasses the geography of the state. The key to private law and justice is the same as the key to money: remove the trusted third party by decentralizing control down to the individual.
Justice occurs when everyone receives what they deserve. Libertarian or private law consists of the rules necessary to achieve this end.
The most persuasive theorist on private law may well be the libertarian Randy Barnett, who teaches legal theory and contracts at Georgetown University. In his book The Structure of Liberty, Barnett contends that the adjudication and enforcement of law should be privately administered, with inefficiencies addressed by the free market; an example of the latter in crypto is the emergence of decentralized exchanges to handle conversion problems. Barnett argues that private law is the solution to the corrupting influence that vested interests and power will inevitably exert upon justice.
Private law is incredibly simple compared to modern models. Barnett writes, “Every dollar spent to punish a drug user or seller is a dollar that cannot be spent collecting restitution from a robber. Every hour spent investigating a drug user or seller is an hour that could have been used to find a missing child. Every trial held to prosecute a drug user or seller is court time that could be used to prosecute a rapist.” Libertarian law is contract law. And as the iconic Murray Rothbard wrote, “It is not the business of the law to make anyone good or reverent or moral or clean or upright.” Law should make people whole.
(Note: how contract law could handle fraud and other acts of aggression will be addressed in subsequent installments. This installment deals with exchange.)
Private law requires two things: voluntary interaction and an instrument of enforcement. Again, the voluntary interaction is the contract, which is not restricted to the economic exchange. There is no aspect of human contact that agreement—implied, verbal, or written–cannot govern.
The obstacle over which theories of private law have stumbled is the instrument of enforcement. For one thing, it invites the participation of a trusted third party. The third party in private law would be a free market one and, presumably, it would be restrained by dynamics like the desire to preserve a good reputation. But any model of law that is dependent upon a trusted third party is vulnerable to corruption, incompetence, and other risk factors. The more dependent it is, the more vulnerable it becomes.
The genius of Satoshi Nakamoto was to remove the trusted third party problem from economic exchanges, but the blockchain’s potential extends much further. It has profound implications for contract law.
Some of the Blockchain’s Implications for Contract Law
A transfer on the blockchain is a simplistic peer-to-peer contract, which memorializes the terms for those involved and is seen to be valid by the surrounding community through transparency. It is a voluntary exchange. The blockchain is also an instrument of enforcement that embodies the terms of execution, such as irreversibility, to which both parties have agreed; their agreement is expressed through the willingness to use the blockchain. Thus the blockchain expresses both requirements of libertarian law; it facilitates voluntary interaction and it acts as an instrument of enforcement.
When law is reduced to contracts and their execution, then the code is the law, literally. This sounds simplistic because it expresses the simplicity of private law.
But the peer-to-peer and one-off exchanges offered by the blockchain has limited value for societies that require complexities such as ongoing contracts for rent. That’s where smart contracts (discussed in the previous installment) come into play. The self-executing contracts allow individuals to escape the blockchain’s limitations by setting their own additional terms for an exchange and its enforcement, including provisions for default. Smart contracts are in a primitive stage of development right now, but their social and political significance are clear. They decentralize law down to the individual level by personalizing the terms of agreement and eliminating the need for a third party instrument of enforcement.
This paradigm of law is free of geography, which makes it free of the perceived need for consensus. The blockchain erases borders as it carries the contract that is consent into every jurisdiction of the world. The implications of this are immense.
If every exchange defines and executes its own version of law, and if justice consists of each person receiving what he deserves, then people can code their own version of what is just and many visions of “justice” can exist and self-execute in parallel and peace. One person might conduct daily life through contracts that express Western common law. His Orthodox Jewish neighbor may prefer contracts that embody Hasidic law. Another neighbor may be a communist. If justice is decentralized down to the individual, then rampant diversity is not only possible but also inevitable. In other words, a free market in justice.
The code is not only the law, it is also justice.
The need for law enforcement, attorneys, and arbitrators would not be eliminated, but it would be so reduced as to become invisible to most people. The need would not be eliminated because it is still necessary to address not merely the operation of daily life but also the break down of daily life: acts of fraud and other violence.
[To be continued.]
Reprints of this article should credit bitcoin.com and include a link back to the original links to all previous chapters
Wendy McElroy has agreed to ”live-publish” her new book The Satoshi Revolution exclusively with Bitcoin.com. Every Saturday you’ll find another installment in a series of posts planned to conclude after about 18 months. Altogether they’ll make up her new book ”The Satoshi Revolution”. Read it here first.
The US Patent Office has awarded computing giant Intel a patent for a processing system that optimizes Bitcoin mining.
Denitza Tyufekchieva, business development manager of Propy has expressed a need for different locales to adopt shared real estate regulations. While completing transactions with the disparate regulations in today’s environment is possible and even relatively simply for Propy, it would still help the global market, she says.
“In the future, we envision a world with a global standard for registering [property]. […] Imagine we all have one global standard for our properties and we can actually transfer them”
Propy is a real estate blockchain company, facilitating global real estate deals while also supporting cryptocurrencies. They also submit the deeds to the blockchain, enabling secure digital storage and accessibility. But it’s their buying platform, which they compare to Zillow, that is most significant. Besides supporting cryptocurrencies as a payment method, they also support multiple languages, further boosting their cross-border credentials.
The issue is in how careful they have to be to not overstep regulation in the various locales and the European and United States systems, that are quite similar anyway, should unite behind one.
“We want Europe and the US to understand that there are common themes in their standards, so of course we could have a global standard.”
They have already done more than a dozen transactions using the Ethereum network. While that doesn’t sound like a lot, they are very large and legally complicated. Adding a layer of crypto payments and all that entails adds another layer of complexity.
But Propy feels that the cross-border nature of cryptocurrency and the permanence and accessibility of the blockchain makes it worth it. And that enables Propy to simplify the entire process overall, despite the added crypto complexity.
Buying a property is complex. It involves multiple middlemen, including agents and banks on both sides, but it doesn’t need to. For people paying upfront, real estate sales don’t have any need to be any more complex than buying any other item. Propy is on the way to accomplishing that.
Propy raised 15 million from its ICO last year. And like all ICOs, there is an open question on its legality when considering the recent comments by the SEC. Hopefully, its use within the Propy platform as a means of settlement will prevent it from attracting the SEC’s ire.
Currently, transferring property deeds requires the involvement of the government. Propy does not and could not cut them out of the process. Instead, they make it so every transaction is legally compliant in their location. The eventual goal is to make Propy and its blockchain transactions, part of the way the government itself transfers properties.
But that is a long way off, so, for now, they do both the legal transfer and the move on the blockchain, which provides a provable record of the transaction for as long as the blockchain exists. But to get to that next step, they need to get governments on board, and as Tyufekchieva said, a unified standard would go a long way to making that a possibility.