Thread by @CaitlinLong_

1/ IT MAY SURPRISE YOU that, as a #bitcoiner, I think @BIS_org's proposed 1:1 capital rqmnt for #bitcoin is TOO LOW & view banks entering bitcoin trading as bad for banks & bitcoin's price volatility. The problem isn't Bitcoin--it's the banks.@ForbesCrypto
forbes.com/sites/caitlinl…

2/ @BIS_org's capital proposal completely missed biggest issue w/ banks holding #bitcoin on-balance sheet: settlement risk. Traditional banks are simply not set up operationally or technologically to hold on-balance sheet assets that settle in minutes w/ irreversibility.

3/ Many spoke out that the 1:1 capital rqmt was too high. But the opposite is true. The Basel III framework isn't set up to assess settlement risk. It doesn't have to, bc there are all kinds of operational fault tolerance mechanisms built into traditional financial markets.

4/ 🚨But #Bitcoin has no operational fault tolerance.🚨

This is a feature, not a bug. For banks whose IT & operations aren't set up to deal with an asset that settles in minutes w/ irreversibility tho, it poses a big risk. And banks are leveraged. Leverage amplifies mistakes🧨🔥

5/ Most banks settle up only once a day, but #bitcoin settles in minutes w/ irreversibility. This means a bank could develop a big exposure intraday w/o even realizing it until reconciling overnight.😱

Delayed net settlement papers over a lot of plumbing problems in #TradFi👩‍🔧🪠

6/ Traditional leveraged banks have all kinds of back-ups that aren't available to #bitcoin: the discount window, permitted failures to deliver, collateral substitution in securities financing, ETF market makers authorized to create uncovered short positions, among many examples

7/ Such back-ups smooth over settlement failures, as do structural features such as lenders of last resort or clearinghouses that allow banks to withstand temporary settlement failures: Fed (dollars); DTCC (securities); ICE, CME, and LCH (derivatives); & LBMA member banks (gold).

8/ In all those asset classes (including gold), the banking system controls the underlying collateral. But the banking system won't ever control #bitcoin, or #ether or similar #crypto. Why?

9/ Bc individuals own vast majority of #bitcoin & it's squirreled away (or lost) & rarely traded. Only ~22% of bitcoin supply is free float. In bull markets that can drop to ~12%.
Or to put it in banker terms--collateral is always scarce & failure to timely deliver it is default

10/ Again, it's a feature not a bug that #WallSt will never control #bitcoin & will not be able to build inside-the-system clearinghouses and operational fault tolerance to smooth over settlement failures, as it did in other asset classes (including gold).

11/ But is there a safe & sound way to integrate #bitcoin into the banking system? Yep, you bet there is. #Wyoming did it. So did #Nebraska. And the @ForbesCrypto story provides a checklist of what needs to be done.

12/ There's a perception that when states jump out ahead there's a "race to the bottom" on regulations. But in this case OPPOSITE is true. #Wyoming & #Nebraska laws prohibit banks from holding #bitcoin on-balance sheet--they're MUCH STRICTER than the @bis_org, which permits that!

13/ To be clear, I do believe it's safe for traditional banks to provide #bitcoin custody services (off-balance sheet), as #Texas also allows its banks to do.
Note these states also did something @BIS_org requires as a pre-requisite before banks can hold bitcoin on-balance sheet

14/ They clarified legal status of #bitcoin. In the US, only WY, NE, TX & AR have done that. @uniformlaws is working on a national proposal that each state would enact--in 2022+. Notably, NY--where most of the banks are located that want to trade #bitcoin--hasn't clarified yet.🤦‍♀️

15/ It's natural for @BIS_org to try to fit #bitcoin into existing frameworks & poo-poo states like #Wyoming. But both are mistakes.

The info frontier in bitcoin is NOT on #WallSt or in #SiliconValley. The info frontier in bitcoin is where the #BitcoinCore devs & big users are.

16/ And they flocked to #Wyoming in 2018 to help create a fair regulatory regime for banks to integrate #bitcoin. Wyoming had the access to people on the knowledge frontier & put in the work. I hope @BIS_org digs in & updates its proposal: docs.google.com/viewer?a=v&pid…

17/ In 2016 I predicted a G-SIB (global systemically important bank) wld someday fail trading #bitcoin bc big banks aren't set up operationally or technologically to handle #bitcoin & clients & front-office traders wld push them before they're ready to handle it safely & soundly.

18/ Well, that's exactly what's happening. It's not good for the ultimate solvency of the banking system. Nor is the entry of big (leveraged) banks good for price volatility of #bitcoin.

But, to be clear, #Bitcoin itself will be just fine either way--it'll keep addin' blocks!💪