Chapter 17 - "Sovereign Banking"

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Chapter 17

“Sovereign Banking”

One might ask, what does banking have to do with Bitcoin.  After all, Bitcoin was always  intended to be a decentralized currency and void of a third-party association.  Free from the pitfalls of banking and financial institutions.  Free from losses of one’s funds through the insecurity and potential actions of others.  This idealistic vision for bitcoin has already proven to be just that, idealistic, with many having lost funds through a variety of causes.  Having said this, it can offer newfound security not seen before.   

Of late, even the U.S. Dollar has become devalued more and more with some countries moving further away from it.  One might question where the dollar is headed.  After all, Russia, China and a few others are looking to completely move away from the U.S. dollar and onto currency forms of their own choosing.  With the international trading system in place and even with sanctions between some governments, it is still difficult to completely wean off by some governments the dependence on the U.S. dollar.  It is likely the dollar will continue to deteriorate in share of global use in the coming decades.  Whether gold, cryptocurrencies such as bitcoin, or other forms of transaction occur and replace the dollar fully is yet to be determined.  

Why bring all this up? Well, it speaks to why Bitcoin was created in the first place.  What was the motivation behind Bitcoin?  If one goes back to 2005, 2006 and 2007, the likely timeline of the material development for the bitcoin vision prior to the release of the White Paper in Fall of 2008, one can recall where banking was at that time.  Again, Bitcoin’s early vision was to eliminate this need for a third party, such as a bank, being involved in the transaction. So, it is an important element of why Bitcoin was created.

The following is an example in the banking realm and subsequent failings of banking as it might have influenced the creation of an alternative (bitcoin) which eliminates the need of a third party for transacting.    

Going back more than a century and in October 1902, Sovereign Bank was founded as a Savings & Loan in Pennsylvania.  This bank expanded rapidly in the 1980s and 1990s acquiring numerous other banks.  In 2000, Sovereign bought numerous New England branches from newly merged FleetBoston Financial, becoming the third-largest retail bank in the Boston area.   As Sovereign continued to invest, grow, and evolve as many banks do, it was subjected to the turmoil of changing and deteriorating economic conditions.  In June 2006, another banking institution outside the U.S. established for many years, Banco Santander, purchased a sizable portion of Sovereign Bank (upwards of 20% for over $2 billion).  Through various savvy moves, Banco Santander went on to acquire a majority stake in Sovereign Bank with the intention of merging as Banco Santander.  The credit rating system of Moody’s had downgraded Sovereign Bank institution making it susceptible to further merger/acquisition.

The downgrade of Sovereign Bank was driven by the United States’ absence of an effective policy to systemic fiscal challenges that had been rising over time.  The common narrative for the start of the financial crises in 2008 suggests that credit agencies downplayed the riskiness of Residential Mortgage-Backed Security or RMBS, drawing in lenders who did not appreciate the intrinsic risk.  

In October 2008, Banco Santander completed its acquisition of Sovereign which now was a larger stake for less money than initially set out.  Sovereign Bank was severely affected by losses related to auto loans and stock in Fannie May and Freddie Mac.  Banco Santander had seen substantial losses in its investment to date but went on to complete its acquisition of Sovereign Bank at much lower costs now on January 30, 2009.  

Banco Santander, a new merged conglomerate, much larger and susceptible to a changing economic environment.  In 2011, the bank announced plans to formally relocate its headquarters to the U.S. and in September 2011 the bank announced it would officially change its name to Santander as part of its parent company’s goal to create a global brand.  The rebranding was completed on October 17, 2013.  

So, why is all this important? Because during those few years prior to the release of the Bitcoin White Paper on October 31, 2008 and prior to the release of the executable program for mining bitcoin on January 8, 2009 there was much turmoil in the banking and financial industry.  Not just in the United States, but elsewhere.  

This turmoil and the overlap with the creation of Bitcoin as a decentralized currency is not by happenstance.  If one is living through that turmoil and insecurity of the banking system, we can see how this would be motivation to create an alternative to it.  One should also recognize that the banking institutions in America, although some failed completely such as Washington Mutual and many lost enormous sums, generally speaking most in the United States are backed by the FDIC to a certain extent.  Not always the case elsewhere around the world. So, to think one could have their entire life savings built up over time and to believe it is secure in a bank only to have it lost in one swoop of turmoil in the economy or political environment is disheartening to say the least.  Anyone that cares about the world and would want better conditions for society would want a more secure means of preserving a person’s lifetime of work.  Bitcoin would potentially offer this under the right conditions.  

To summarize, the turmoil occurring in 2008 and 2009 and soon thereafter overlap with much of what was occurring with Bitcoin, its development, its vision to solve a true problem of trust, and has influence with the subsequent known communications by Satoshi Nakamoto.  In one such critical communication known as the “Genesis Block” there is an embedded message by Satoshi Nakamoto.  What makes this one unique is it was not within the P2P forum or other emails.  It was the sole message embedded into the actual blockchain going forward.  That very first Bitcoin blockchain has an embedded message together with all the characters that are part of the proof-of-work that ultimately achieves a mined bitcoin. 

 It reads:

...Ethe Times 03/Jan/2009 Chancellor on brink of second bailout f or banksyyy…

Genesis Block – 

This caption coincides with the newspaper, The TIMES with the same headline and a story about the banking failures and insecurity of the system.  

Clearly, the stability of the banking system in general in the United States and abroad was on the mind of Satoshi Nakamoto and played a role in motivating the creation of a decentralized currency.