Bitcoin financialization and custodial services, the real threat too few talk about

Financialization will bring new risks and will increase third party custody well above 50% of current stock. This may be a systemic risk for bitcoin.

(i) “…if something goes wrong [with the custodian] and people want to exit to the safety of self-custody, the on-chain throughput limits mean that it’s infeasible for a mass exit to happen quickly. Another point was that custodians will be more capable of paying very high transaction fees to make settlement transactions between each other, thus pricing out the average user from making on-chain transactions”

(ii) a political attack could unfold, whereby authorities “… will demand more onerous disclosure requirements from exchanges, more draconian rules around AML/KYC, and so on. Eventually, pressure from regulators and nation states results in custodians censoring transactions and seizing funds” [like banks did to do to comply with Roosevelt Executive Order 6102].

(iii) an attack on the protocol could unfold, whereby “the custodians coordinate a fork (hard or soft) and change the rules. Any contentious fork results in a chain split, at which point each side vies for economic superiority by selling off the branch of the fork they don’t support. This could be made more devious by custodians selling off the fork branch they want to see die off.”



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