Don’t trust – verify!
Bitcoin and self-custody technology are revolutionizing banking. For the first time in history, people can have full control over their assets and investments. Banks must adapt or risk irrelevance.
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The year is 2008. A shiny September morning in New York. As a young analyst, I am heading down to Wall Street. Markets have been in a freefall for days. My manager reassured me that this was the regular financial cycle. I trusted him, betting my future on his expertise – a costly mistake.
On September 15, 2008, Lehman Brothers filed for bankruptcy, the largest failure of a financial institution in U.S. history. The market continued its downward spiral, plunging the U.S. economy into one of the worst recessions in decades.
It took me 15 years in the industry to process what happened that day. The market did not just drop, it vanished. No buyers or sellers in the market. Trust in the financial system evaporated.
The Birth of Bitcoin and Self-Custody: A Response to Financial System Failures
On October 31, 2008, weeks after Lehman collapse, Bitcoin was born. The timing was no coincidence. Bitcoin was created as a fire escape from a broken system, one that failed to preserve market integrity.
The vision of Satoshi Nakamoto, Bitcoin’s creator, enabled the birth of digital self-custody: the ability to uniquely own and control something that is in digital form. The idea became possible as Nakamoto discovered a way to link cryptographically the digital and physical world, by binding bitcoin issuance (digital) with electricity (physical). This innovation gave rise to self-custody technologies: hardware and software aimed to secure digital value. Among those are “Hardware Wallets”: physical devices built to protect the user’s unique digital signature, required to authorise the transfer of digital assets.
These tools eliminated the need for third-parties, reducing counterparty risk and enabling verifiable digital ownership without trusted intermediaries, previously considered impossible.
This created an alternative financial system, altering how assets are secured, owned, and transferred, and enabling people to autonomously organise financial resources.
Banks at a Crossroads
Banks are at a crossroads now: clinging to a future of total financial surveillance, which has led to catastrophic economic failures in the past, or adopting this new technology that returns control to individual market participants.
Banks can explore three use cases to integrate:
1. Custody and Wallet Recovery
Hardware wallets are built to secure cryptographic keys, controlling access to digital assets. Original wallet technology offered only a single private key option; if the key was lost or stolen, the assets would be compromised. Over time, more advanced cryptography emerged offering multiple key recombination options to improve security: Multi-Sig, Shamir’s Secret Sharing, and Threshold Signature Schemes. The responsibility of protecting digital assets can now be shared across multiple parties holding part of the total number of keys so as to avoid a single point of failure.
Banks can play a key role in this security model, where controlling keys are distributed, allowing the user to keep enough keys to control and sign transactions independently, while a minority number of keys are held by a third party (for example a bank) for backup.
This approach gives users a good trade-off: personal control over their Bitcoin, with institutional-grade security for key backups. It also introduces a new role for banks in the world of digital assets, as “Key Recovery Agents” who can help users regain access to their wallet.
Banks service can also include additional support functions like: onboarding, transaction signing, and automatic transfer of assets (for example inheritance).
2. Lending and Collateralization
As Bitcoin adoption grows, many holders prefer to borrow against their Bitcoin (using it as collateral) rather than selling it. Banks can provide here:
- Fiat liquidity for Bitcoin-backed loans
- Counterparty credit review
- Custody of Bitcoin collateral
Banks can hold Bitcoin collateral for the duration of a lending contract. They can monitor collateral, liquidate clients, or resolve disputes when client position is in default.
We can also envision a future where banks are tech providers operating Bitcoin smart contracts to automate risk management in collateralized lending, improving security and operational efficiency.
3. Trading
Bitcoin Layer 2 solutions (Lightning Network, Side Chains) are new technologies that have been built on top of the original protocol (Layer 1) to support additional use cases that Bitcoin was not originally designed to support. This technology can enable real-world assets (for example bonds, stocks) on Bitcoin, and direct trading from person to person (P2P) without the need of a centralized exchange.
Banks could play a major role here by:
- Verifying asset authenticity,
- Providing temporary custody of traded assets, and
- Offering client support in case of technical or liquidity issues
Most of the technology for those use cases has been already developed, banks can leverage existing solutions in the market to start providing standard banking core services on those assets: custody, lending, and financing.
Challenges and Considerations
Barriers to adoption still remain, like upgrading regulation, improving education, and user experience. However, the main drag for this new technology remains investors’ preference of convenience and speed over self-reliance and risk control.
For the first time in history, people can have full control over their assets and investments; the limit lies in their willingness to take over this power, and for financial institutions to support them in this journey. Banks can adapt to this new market and play a critical role or become irrelevant.
