A Swiss bank is now offering to buy bitcoins for its clients. Investors can ask their asset
manager at Falcon Private Bank, a boutique investment firm headquartered in Zurich, to purchase and store
bitcoin on their behalf – a first for conventional banks. Despite the cryptocurrency’s infamous volatility,
this is another indication that is here to stay.
“We have various clients that are interested in buying bitcoin for investment purposes, and we’re making it
very convenient for them,” says Arthur Vayloyan, the global head of products and services at Falcon. Because
Falcon will be doing the buying and storing of the digital coins, its customers won’t require any specialist
knowledge to switch their cash into bitcoin. The Swiss financial authority, FINMA, granted Falcon regulatory
approval on Tuesday.
But some worry that people may be underestimating the importance of decentralization to the digital currency.
Traditional banks that hold large sums of bitcoin for their customers will be obvious targets for hackers.
“It’s a lot easier to steal digital currency than a traditional currency,” say Andreas Antonopoulos, host of
the Let’s Talk Bitcoin podcast.
“This is why decentralization is so important,” Antonopoulos says. Indeed, Bitcoin is built on decentralization.
Instead of central banks and governments, Bitcoin relies on a network of computers that anyone can join to check
the legitimacy of transactions. Every Bitcoin is accounted for on a digital ledger called the blockchain that
records how many coins each digital wallet holds.
Whenever currency changes hands, everyone on the network updates their copy of the blockchain too. Underpinning
the whole system is some complex mathematics that makes it incredibly difficult to deceive or control without
infeasible amounts of computing power.
The wallets are decentralized too. Instead of bank accounts, anyone can create and store their own bitcoin wallet.
Because there is no centralized collection of wallets, there is no central target for hackers to try to steal large
amounts of digital currency. Or at least that’s the idea (in practice centralized pockets can emerge).
Put lots of wallets in the same place, and the system may no longer hold. If a thousand people each hold a single
bitcoin, a certain level of security will be sufficient protection. However, if one place holds a thousand bitcoin,
you increase the appeal to hackers a thousand-fold too, which means you have to similarly up the security. “But
there is no way to do this. By putting in more eggs you make the basket weaker,” says Antonopoulos.
We have seen this problem before in exchanges, where people trade different digital and traditional currencies.
The biggest of these until 2014 was Mount Gox, which at the time was handling more than half of all bitcoin
transactions. In February of that year, 850,000 bitcoins corresponding to $450 million at the time went missing,
with most thought to have been stolen by hackers.
Only a few years ago, many conventional banks still thought that bitcoin was doomed to fail, but as the price has
soared and it has continued to survive, it has become too attractive for investors to resist. In 2012, you could
buy a bitcoin for less than $10, last month they were selling for a record high of $3000. Illustrating the currency’s
volatility, it’s currently trading at just under $2500, but overall has tripled in value in the last year alone.
Users of Falcon’s bitcoin service will have to sign a waiver to show that they understand the risks, as they would
with other high risk investments. In future, the bank plans to expand to other digital currencies.