Friday, May 23, 2014

Bitcoin Bank

For the purposes of this post I will refer to Bitcoin as an example of all crypto-currencies as Bitcoin was the original, but the following applies to all derivatives of it.

I have just been reading about the failed bitcoin exchange Mt. Gox  and a bank called Flexicoin Bank, it was robbed and has gone bust and it occurred to me that it would be interesting for a large commercial bank to start a Bitcoin operation, probably as a separate entity.

My reasoning is thus:  Since Mt. Gox and Flexicoin simply didn’t have the resources to secure their systems in a manner sufficiently effectively to prevent the hacking, only people in Bank or similar companies that have track records for this kind of work can reasonably attempt it.

They would be able to deploy the highest levels security, as their security team as part of their development team, which would be familiar with attempted hacks into the accounts and systems and would have the technical know-how to have a reasonable chance of storing Bitcoins safely.

As the chain of thought continued then it occurred to me that there may be an opportunity for a business, pretty much along the lines of the old style Wild West banks where Gold bullion and other currency which had real value e.g. silver, jewels, etc. as well as paper notes could be deposited in buildings with physical secure access
Now it is possible to email a Bitcoin to somebody else as an attachment, or on a USB key. So this bank would be a physical building
I am thinking about Andorra where I reside, which is an extremely safe country, which doesn’t have the kind of banking reputation that Switzerland does but there is no reason why it shouldn't.

So I envisage a physical structure, physically secure, containing a lot of USB keys or some other devices (as maybe USB devices deteriorate over time?) but there would of course be some way of storing them physically in the building and the bank / institution handling these would charge a fee for storing the Bitcoin
I mean you can't really charge interest... well you can try and charge interest but I suspect it probably wouldn't work, what would probably be better a business model would to be to charge some form of holding fee.

Clearly the more valuable the coins stored there are  the more likely that someone is going to going to want to come and steal it, so there has to be security in place and that will increase as the value of the Bitcoins increase.  This could be chargeable as percentage fee, which is akin to interest, and then you could also charge on a transaction basis.

The building itself would need the computers to send/receive the bitcoins with otherwise limited access to the internet to prevent hacking and stealing via that route: It would also have a tellers where customers could walk up with their own USB keys for deposit. So if somebody would like to retrieve or deposit their BitCoin, they could turn up in person with the physical device, their USB key or their CD or whatever their Bitcoins are stored on.

If the bank can accept encrypted email there and no network access other than the transmission of the email and receipt of the text and the email with the BitCoins encrypted in the text format but inside an encrypted envelope. 

Who is going to take it on?

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