© 2019 by Saroj Investments, LLC. 

Bitcoin: The Napster of banking

12.21.2017

 

The rise of Bitcoin reminds me of the era of the Napster. 

 

Napster was a late 90’s startup that revolutionized the way that music is distributed to consumers. Napster made music available and shareable peer-to-peer for free. In essence they were a conduit for piracy and copyright infringement, and seemed an unstoppable threat to the music industry.

 

Napster was later shutdown in the United States but international companies developed similar products. Even today copyright violation is alive and well through the use of bit-torrent sites, but most of Napster’s innovation lives on in completely legal products for listening to and purchasing music. What initially seemed to be a dire threat actually made the music companies change the way music was sold.

 

The Bitcoin situation sounds so similar to me. In the world of banking where everyone is trying to figure out peer-to-peer payments Bitcoin is an unregulated means of transferring large amount of money without trace-ability thus giving financial access to gangsters, drug dealers, and other criminals to pursue illegal transactions more easily. This violates rules the regulators have imposed on financial institutions for years including the US Patriot Act or any other BSA/AML acts: https://www.ffiec.gov/bsa_aml_infobase/pages_manual/olm_106.htm

At some point the lack of regulation for Bitcoin transactions will be scrutinized and might mean the slowdown of the Bitcoin activity or even lead regulators to shut it down. Regardless of that this is what I believe we can expect in the wake of Bitcoin:

  1. The rise of another cryptocurrency : There are high chances that another cryptocurrency will work with the financial institutions to provide checks and balances ensuring that the conversion of currency is audited. Ripple seems to be going in this direction - Bankers guide to blockchain

  2. Pressure on banks and credit unions to adopt blockchain for peer to peer transactions: With growing demand for peer to peer transactions it is critical for financial institutions to get on board, and believe me financial institutions don't react until they have pressure of losing business.

  3. The Death of Bitcoin: The concept itself of Bitcoin is awesome. The Bitcoin traders will benefit but not the investors. Even though the concept can grow, the ugly truth of Wall Street is that a product like Bitcoin is great for pump and dump . When it comes to using the concept of Bitcoin for day-2-day life it will be just like Napster - a product that was highly used and the a good starting point but only a means to revolutionize the idea. 

About 40 percent of bitcoin is held by perhaps 1000 users (Source - Bloomberg Article). Long term, no country in the world would be OK with untraceable money. The point when the FDIC regulators step in and start looking at the trace-ability that's when the traders will know to get out of trading Bitcoin. Enjoy the ride of Bitcoin till then!!!!

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