Lending is necessary for cryptocurrency adoption

In light of the collapse of the crypto interest industry in November 2022, PROHASHING and author Steve Sokolowski are commencing litigation against multiple lenders and individuals discussed in these articles. These posts are outdated and will not be updated due to the ongoing legal actions. You should not rely on the information presented here. PROHASHING and the author are no longer able to respond to comments and support tickets regarding crypto interest companies.

 

There have now been probably seven bubble cycles in cryptocurrency history.  13.5 years after the first bitcoin was mined, it seems as if the world is no closer to widespread adoption.  Shortly after the second bubble of 2013 crashed, I remember reading people who stated that someday, Wal-Mart and Newegg would accept bitcoins, and that would push the price of bitcoins above $1,000.  Now, one bitcoin is worth 30 times as much, and Wal-Mart still doesn't accept the coin.

Until we see widespread adoption, the market will continue to be ruled by traders, speculators, and people looking to make a quick buck, with ridiculous volatility, rather than people who are actually using cryptocurrencies to transfer money to each other.  The lack of actual adoption seems odd to users, because anyone who's actually used both the legacy banking system and cryptocurrencies to transfer value will recognize immediately that cryptocurrencies are superior in almost every way.


Real-life situations

Rather than abstract "examples" that one often reads about in blogs and forum posts, I'll share some real-life examples where I've wasted tens of hours and much money dealing with the legacy financial system.

Credit card bills

Recently, I decided to consolidate bank accounts.  Several accounts were closed, and a new account was opened.  Unfortunately, the new account was opened with a wrong type (I still don't understand exactly what happened,) and the bank rejected the scheduled credit card payments.  I had more than enough dollars in the accounts, as well as plenty of USDC and ETH, to cover the debt to the card companies.  The error occurred silently, and I didn't know about it for several days, during which hundreds of dollars in penalties and interest charges were issued.

Because the card companies only accept payments through the legacy system, the only solution at that point was then to get the account error corrected, transfer money to the corrected account, and reschedule the payments.  Because the error happened the Friday before a holiday, but the banks charge interest every day, it took four days just to get the account issue fixed, and two more days for Coinbase to use the ACH system to get extra money into the account to pay all the penalties.  Altogether, eight days of fines and interest accrued between the account error and when the debt was finally settled.

Meanwhile, Prohashing has hundreds of thousands of USDCoins in a paper wallet as described in our wallet security guide.  If the card companies accepted USDC, we could have paid these debts in 12 seconds, even while we were on the phone with them.


Frozen transactions

Prohashing contracted Digital Silk, a graphic design and marketing firm, to create its new website.  Initially, Digital Silk accepted payments using a payment processor that accepted credit cards, and we paid $6000 to them by card in one of our first payments for their services.

Several weeks later, Digital Silk contacted us, stating that the card processor had frozen the transaction and would not release the money for nine months.  They asked us to contact Wells Fargo to reverse the transaction to Intuit, the payment processor.  After 10 hours of work over the course of a month, which consisted of many phone calls and E-Mails between Digital Silk, PROHASHING, Wells Fargo, and other companies, it was determined that Wells Fargo would not reverse the transaction to Intuit because they believed it had been properly paid and PROHASHING had received the requested services.  As a result, Digital Silk's money was (and likely still is) still frozen by Intuit.  I ended up suggesting that they engage in litigation to unfreeze the funds.

I asked Digital Silk if they would accept bitcoins, ETH, USDC, or any other coin, and they refused.  As a result, they ended up suffering significant consequences to their finances.


Real estate transactions

When I purchased a house yesterday, the company wanted payment to be received by Fedwire, with no other options.  I had only written personal checks from this account before, so I contacted the company receiving the money to get the payment instructions.  From all the other horror stories I encounter on a daily basis with the legacy banking system, I requested the information nine days in advance so money could be in the right accounts.

Due to what apparently is some sort of spam filtering error on their mailserver, they stated they never received the request for the payment information.  Then, when I suspected their mailserver was marking the messages as junk and called them, it was Friday and of course nobody was willing to check their voicemails during the weekend, wasting four more days.  I then discovered that Wells Fargo was also marking my E-Mails as junk, indicating that our mailserver must have been added to some sort of blacklist maintained by a central vendor, leading to the manager of my accounts seemingly ignoring my requests to wire the money.

Finally, having thought that the virus outbreak in their area had closed the branch office, on Wednesday, I called the Wells Fargo national number, went through four bankers over the course of an hour, got connected to the branch office, and discovered that nobody was infected after all.  But then I had to spend another two hours receiving paperwork, printing it out, signing it, and re-scanning it, wasting ten pages of ink.  Finally, I had to perform authentication with Wells Fargo, answering random questions about my accounts.  As a bonus step, I had to send another E-Mail to actually have the Fedwire transaction sent, through the intermediary bank.

Alternatively, had the sellers been willing to accept them, I could have just plugged in a Ledger and sent ten bitcoins to them, and they would have expected confirmation 6.9 minutes later.  If the transaction wasn't sent as replace-by-fee, they probably could have even relied on it instantly, as it is very difficult to get miners to double-spend a transaction even if a new transaction is sent with a huge fee; I actually implemented custom code to look for such opportunities at one point.


Why not?

It's clear from these three examples that cryptocurrencies are not only better, but amazingly superior to the legacy financial system. You can skip everything I read above and still come up with a compelling argument by looking at the calendar.  If you're reading this article on the day it was published, try going to the bank right now to deposit a check and see what happens.

Even if one argues that these three instances weren't the size of transaction one would engage in at the grocery store, millions of these large-value transactions occur every day.  Furthermore, it's not as if anyone anymore doesn't know that coins exist, as could have been the case in the past.  So why don't we see merchants using cryptocurrencies, at least for business-to-business payments?

One proposed answer that often appears on the Internet is that cryptocurrencies are "too difficult to use" or have "poor UI."  If that were the case, then the significant advances in the user experience and security, such as nearly foolproof Ledger wallets, would have made at least some advances in widespread adoption since their introduction.  There is no magic missing "UI feature" that people will suddenly see and say "wow, that's amazing," and ditch their cash the next day.  This excuse is made by developers who correctly understand that it's trivial to implement fantastic technology, but who incorrectly believe that having a superior product is sufficient, or even necessary, to spur adoption of that product.

A possible answer is that after 13 years, developers of the largest chains have not solved the capacity problem.  ETH 2.0 continues to be vaporware, having been pushed back for years, with sharding now scheduled for release in late 2023 in the most optimistic case, while endless testnet merges and simulations are run.  By that time, existing "layer 2" solutions may well have locked in and cancel the transition by making it seem as unnecessary and risky.  The Bitcoin Core developers continue to be all-in on the Lightning Network, which also continues to be an abject failure.  Its current funds availability of $113m is now on the decline.

But if cryptocurrencies suddenly became so needed that capacity became an urgent issue that needed a resolution overnight, then Bitcoin SV exists.  Some criticize the coin for its poor design, but its simple choices would allow quick adoption if that became absolutely necessary.  It has enormous gigabyte-sized blocks, the ability to be protected by existing bitcoin miners, full API compatibility, an existing market capitalization 10 times higher than the Lightning Network's capacity, and unlike the Lightning Network, it does not require injections of other people's money to run. It would suddenly dominate as the #1 cryptocurrency.  Because that hasn't happened, there is obviously a larger problem that still prevents adoption.


Benefits to the recipient

While the 2017 bubble was cut short in large part because bitcoin's fees reached $50 and cryptokitties made ETH unusable, I argue that almost all of the technical limitations preventing cryptocurrencies from running the world's financial systems are now solved.  I also showed above how people sending money - particularly those sending large amounts - reap huge benefits from the use of cryptocurrencies.  While others' experiences may differ, I also don't encounter many people online or offline who seem deadset against the idea of buying things with cryptocurrencies.

Therefore, the problem lies with the recipient, not with the sender.  In particular, the recipient often owes debt to huge lenders.

In the credit card example, the card company, if it is a Federal Reserve primary bank, takes loans from the Fed, and therefore owes debts to the Fed in a different currency than the coin being sent.  The card company would have no choice but to convert some of its coins to pay off the dollar-denominated debt it owes. 

For the frozen transactions incident, whatever opportunity cost was imposed upon Digital Silk was obviously not sufficiently high enough for them to reconsider their payment methods.  Perhaps losing the interest on $6,000 for a year, or even the $6,000 itself, wasn't a big deal to them.  Or, perhaps there is some step in accepting cryptocurrencies that would have cost them more than $6,000, such as paying and teaching someone to set up a paper wallet or a Ledger.  If Digital Silk had lost $100,000 in the incident, they would almost certainly have come to a different decision regarding accepting coins in the future.  Regardless, they likely had loans to pay off that needed to be serviced in dollars and the inconvenience of these frozen payments was insufficient to offset the fees required to convert money to pay the loans.

In the case of the real estate transaction, my suspicion is that because the seller owed money to a bank, they would have to exchange some of their received money to pay off the lender in a different currency.  That exchange and the withdrawal fees taken by the exchange would cause a significant loss.  Even the various middlemen involved in the transaction who wouldn't be necessary or who would take lesser roles in a coin-run world, like "title companies" and "escrow services" may charge less than the exchange fees.


The answer: loans

So why aren't cryptocurrencies more widely adopted today?  In short, senders can't send them because recipients won't accept them, and recipients won't accept them because they can't borrow enough money in cryptocurrencies.  The world is run by companies that carry enormous amounts of debt, many of which never have any intention of turning a profit and which operate under the "Silicon Valley" investing model.

Wal-Mart, if it chose to do so, could singlehandedly spur widespread adoption by announcing that it would offer a discount for payments in bitcoins.  The discount could be funded by the difference in interest rates between banks and cryptocurrency lenders, which is already significant.  The Wall Street Journal Prime rate is currently around 4%, while Gemini Earn is paying out just 1% on bitcoins, which would allow a company like Gemini, if it had enough money, to undercut the Prime rate and still earn a significant profit, even before the Fed raises rates another 3% as it probably will in the coming year.  But Gemini, Genesis, and all the De-Fi protocols combined don't have enough coins on offer for a large company to consider borrowing from them.

As a result, since the only loans Wal-Mart can take aren't denominated in bitcoins, it makes little sense to them to accept bitcoins as payment, because they need to convert their sales proceeds into the loaned currency to pay back the building cost of their stores, and that incurs exchange fees and development costs.

In conclusion, I don't believe we will see widespread adoption until there is finally enough money available in cryptocurrencies for lending to companies.  The entire world is run on credit, and operating a large business often comes down to simply earning enough to service their huge debts.  As interest rates on dollar-based loans continue to rise due to Fed actions, the currently falling interest rates on bitcoins will start to look attractive, and perhaps then we will see some large companies start to turn to cryptocurrency lenders.