Sorry Blockchain, Any Joe Schmoe Shouldn’t Be Able to Start a Bank

Safety issues with some new, disruptive business models highlight why regulations exist. Surely the same goes for firms that hold our money.

AccessTimeIconAug 28, 2016 at 2:04 p.m. UTC
Updated Apr 10, 2024 at 3:10 a.m. UTC
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For years, tech startups sprung up on a daily basis, "revolutionizing" messaging, photo sharing, taxis, damn near everything. Dominant providers were swapped out for new intermediaries who took a cut, new underdogs turned into the new winners.

Even bitcoin, a payment service meant to remove third parties from online transactions, fell into the trap whereby too many startups emerged all focusing on the same thing. In their hurry to build a buzzword-based product investors could throw money at, they missed that they were becoming the new intermediaries they meant to erase.


hinged on the same business model traditional foreign exchange platforms are contingent on, taking a cut when people cannot trade peer-to-peer. BitPay worked as any traditional merchant services business, like First Data and WorldPay, charging to process payments. And a handful of startups affixed slick UIs and emojis to wallet apps, many times shielding consumers from the fact they’re using bitcoin.

Now, we're seeing the same trend in blockchain.

Bitcoin's open-source code has made springing up a new blockchain network, a new platform for financial services offerings, easier than ever. To many, this democratization of financial access is a good thing. But maybe it's not.

Certainly, recent developments should give us pause about democratized financial platforms. As we've seen with other technology, lowering barriers to entry means sometimes mean we're just setting the bar low.


Sure, it’s true that the traditional financial industry hasn't been open to open source (you can't launch an app on Bank of America's platform).

But, whereas blockchain innovators see this as inherently negative, there might be good reasons for it. Should ethereum developers use the platform to build a DAO for crowdfunding? Well, they can. But what a shitshow that became.

The problem isn't that the protocol makes it easier to build. The problem is that it makes it easier for anyone – any Joe Schmoe that doesn't employ adequate quality assurance testing – to build, take retail investor money and walk away unscathed.

During The DAO debacle, many users and outside observers even came out against changes to the network to get investor money back, excusing the mishap under the pretense that the coded legal contract rules.

But as Matt Levine at Bloomberg attested to in one of the better take-downs of the tech-utopians victim blaming, "to the humans who read the English descriptions of the DAO and invested their money based on their reasonable expectations, their losses probably do seem like a problem".

He continued:

"You can't really base the financial system of the future on computers rather than humans, on trusting to immutable code no matter what happens. Financial systems are supposed to work for humans. If the code rips off the humans, something has gone wrong."

The recent Bitfinex hack is another example.

Maybe a company should be able to get hacked, issue blockchain tokens to its users, say they're worth equity in the company, and use that as an excuse to socialize losses across the exchange caused by issues with its own security.

Investors may not have to wait years to be reimbursed, like Mt Gox customers still are. But, who should make that decision? And what should give any company the right to make those decisions without any clear consumer consent? Especially when it clearly has something to gain from the decision?

Common good

Regulation seems to be what most of these new tech players, especially blockchain innovators, want to remove from the equation. If only regulators would get out of the way and let the techies build!

But what this mentality fails to grasp is that regulation is not a construct of technological inefficiencies, but instead one of social discrepancies.

To use a silly example, coffee cups must contain the warning "Contents are hot" not because technologically we don’t have the ability to cool down coffee, but because everyone has a different idea of what "hot" is.

These same problems with permissionless innovation have been observed in other tech sectors. For instance, while Uber has changed the taxi industry, labeling it a nice happy word – 'ridesharing' – there have been extremely troublesome issues with the service.

More people can now make money driving others, but the list of alleged rape and sexual assaults by Uber (and Lyft) drivers is outrageously long. Even more so when you take into account that Uber CEO Travis Kalanick suggests that the media was at fault for contending the company is "somehow liable for these incidents that aren't even real in the first place".

Many people have blamed Uber's weaker onboarding process, which fails to fingerprint drivers for more thorough background checks. That's a safety procedure the traditional taxi industry is regulated to employ because in the unregulated taxi industry's infancy, it had already dealt with these situations.

Airbnb is another example. Sure, there aren’t many cases of guests dying because of ill-equipped homes, but there are some so gruesome it would turn anyone’s stomach.

Zak Stone’s story last year about the death of his father at an Airbnb went viral, sparking debate over what responsibility Airbnb has over the safety of the properties it hosts on the site, namely because the hotel industry is standardized for safety and frequently monitored by staff.

In the piece, Stone said, "Startups that redefine social and economic relations pop up in an instant. Lawsuits and regulations lag behind."

And that’s what cryptocurrency projects and bitcoin/blockchain startups need to keep in mind, that regulation isn't all negative. Welcoming regulation means you’re interested in promoting the welfare of your users, and they provide the main reason you’re in business – making money.

Sure, not all regulations work stupendously. Many have unintended consequences. That's the challenge of creating laws over a diverse group of citizens under nuanced financial and behavioral economics.

But to keep one woman from getting raped, to keep one man from seeing his father die on vacation, from keeping one person from losing their savings, I think we've learned it's worth it.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Coinbase and BitPay.

Dried peanuts image via Shutterstock


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