Bitcoin And The Offshore Financial Layer

When we talk about the future of bitcoin and other cryptocurrencies, we may touch upon many issues and possibilities. From the store of value concept to peer to peer digital cash, many theories and visions are trying to identify the future of crypto payments methods and bitcoin in particular. I wish to approach the topic and the future possible market capitalization from a different angle: whether bitcoin may become a substitute for the recently devastated offshore banking layer.

We can safely declare that the global economy is fueled by a hidden financial layer that allows the smooth, fast and discrete store and movement of capital. According to some estimations 20–30 trillion USD is held offshore, which amount may add up to almost 10% of the global GDP.

This capital is of course not just sleeping offshore. It is rapidly entering and leaving the open layer of corporate world through complex financial and legal structures such as bank guarantees, back-to-back loans etc. Most part of this capital serves as a direct 1:1 security behind corporate financial transactions performed publicly. Many big multinationals are keeping their reserves offshore while using them indirectly for financing operations.

Just think about it, how many times do you hear about a large company taken over by a small, seemingly insignificant player. The buyer in these cases is not using his own funds, it is using a third party loan, such as a bank loan. How can this party receive the financial support? By a different party in the background providing liquid 1:1security behind the financing of our buyer. This is called back-to-back financing, and it is more usual than you would imagine. This is a simple and quite usual method of offshore funds entering the open corporate layer. Reasons for such transactions may vary, and no, most of the times they are not illegal, they have a strategic business rationale.

The often used misconception concerning offshore funds is that they are used mostly for illicit activities such as money laundering, tax evasion and terrorist financing. Despite being far fetched and of course not true, this has been a quick-win statement for global tax authorities that have been using terrorist financing as their buzzword during the last decade while tearing down the ancient principles of a profession which is almost as old as money itself: bankers.

The mere allegation that confidentiality solely serves the purpose of criminals should be disturbing for any citizen in any part of the world. Authorities however have made their approach very clear: if you think you have the right for privacy, you are wrong, and you may better start digging in your inner self for traces of a criminal personality. You have no right to privacy in your communication, concerning your personal data, your business or your finances. Global authorities are pursuing a fearless battle against hordes of international “criminals”, and this glorious effort requires you to open up your entire life.

The reputable ancient profession of bankers was caught in the crossfire. Since the beginning of the financial and monetary history of planet Earth, bankers have been serving their clients. They safeguarded funds that they were trusted with, they remitted funds according to owners’ instructions, they served as a platform for intermediating capital between savings and corporate financings. Bankers have been the closest advisers and trustees of the owners of the funds, and they were requested to maintain ultimate discretion concerning the dealings of their clients.

When the United States launched its fearless crusade against international bank secrecy (FATCA), its efforst were quickly followed by the OECD (CRS) and other international organizations. The organizations forced bankers to switch sides, and degraded this once reputed and trusted profession into the first line of their own intelligence activities. Bank secrecy and client privilege were destroyed during the last decade, and banks were forced to collect and report data, identify and investigate background of transactions — activities that used to be the task of government or police organizations.

Returning to my original statement however, it is clear that the global economy needs to maintain a rapid, discrete and protected second layer for capital reserves and movements. This is how the system has been operating for a long-long time, this is in its true nature. It is a necessity of its existence. And I am not talking about the system of international criminals and terrorists, I am talking about real world corporate finances. According to an IMF study, by 2007 the seven largest players in the global financial market — Lehman Brothers, Bear Stearns, Morgan Stanley, Goldman Sachs, Merrill/BoA, Citigroup, and JPMorgan — had shifted $4.5 trillion of their balance offshore. You are free to like or dislike these global leaders of corporate finance, and you may have your reasons for both. But in my opinion you may not address these companies as criminal or terrorist organizations.

I think that the devastation of the offshore banking layer and the flipping of the banker profession from trustee to watchdog will reasonably open a glorious future for bitcoin as a new form of store and transfer of value.

Bitcoin has already proven to be resilient multiple times. Its price has skyrocketed and plunged many times during its previous ten years. It has been declared dead multiple times, and still it is out there, as the clear leader of the crypto market capitalization. Okay, bitcoin is not quick and scalable enough for POS transactions. For real-time small transactions you will always have much better choices within the cryptoworld. But the robustness of its core architecture, its truly trustless and decentralized nature will always secure one very important fact: to get rid of bitcoin the world would have to turn off the internet as we know it. This is in itself an incredible power and level of resilience. Bitcoin is a financial layer that may not be controlled, seized or turned off. It is capable of existing with the same level of resilience and redundancy as the internet itself.

I believe that the offshore capital layer will learn how to use bitcoin for its purposes. It will create its own legal and financial methods for the provision of identical transactions to back-to-back loans as we know them today. And when the global offshore financial layer will finally arrive in the safe harbors of bitcoin, the capitalization of the bitcoin ecosystem may easily reach or even exceed the 20 to 30 Trillion USD threshold mentioned in the beginning of this post. How could it even exceed it? Just consider the fact that the current offshore financial layer has been the playground of significant wealth, but the world of bitcoin may well board those with only small funds but still looking for the safe storage, asset protection and privacy bitcoin might provide.

Would be fun to make an international remittance again without having to fill CRS, KYC and AML forms of your curious bankers right? And do not get me wrong, I honestly apologize if I hurt the feelings of any banker. The experties of bankers in finance and the distribution of capital is a core asset of the global economy. Their profession has been a trusted and reputed practice for ages. Bankers just need to break out from their current role of an intelligence watchdog in the service of Big Brother.

I do not wish to join the line of predictions aiming to forecast the price of 1 Bitcoin within the next five years. I remain with stating this: the world of bitcoin and its capitalization is still in its infancy, upon adoption by the offshore financial layer its upside will be enormous.

Dr. Zoltan Toth - Linkedin