Bitcoin’s invisible tug-of-war between suits and cypherpunks

At a recent Bitcoin conference in Las Vegas, there were so many government and TradFi attendees that Bitcoin purists are starting to worry they’re losing their peer-to-peer digital cash system to the “suits.”

From BlackRock’s initial move for a spot Bitcoin exchange-traded fund in the summer of 2023 to US President Donald Trump’s embrace of crypto, all signs indicate the institutions are finally here.

“The years of Bitcoiners clamoring for ‘institutional investors’ and pursuing price appreciation more proactively than privacy, self-custody, and other cypherpunk ideals have led to Bitcoin rapidly becoming just another TradFi instrument,” Cake Wallet vice president Seth For Privacy tells Magazine.

However, Darius Moukhtarzade, a crypto research strategist at spot Bitcoin ETF issuer 21Shares, points out that there are benefits and disadvantages to the union.

“Institutional adoption brings scale, credibility and infrastructure maturity, thus improving liquidity, reducing volatility and driving compliance clarity,” he says. “But it also introduces custodial risk, potential censorship and ideological drift.”

Perhaps the increasing influence of traditional institutions was inevitable as Bitcoin grew into a $2 trillion asset. But are the institutions influencing Bitcoin, or is it the other way around?

Problems with TradFi’s embrace of Bitcoin

Bitcoin was created as an alternative digital financial system that removed the kinds of centralized power found in the legacy financial system, such as the power of the central bank to inflate the money supply and the ability for banks to access personal financial data. 

The pseudonymous creator of Bitcoin, Satoshi Nakamoto, explicitly wrote about many of these issues.

But with TradFi’s growing interest in Bitcoin as a neutral, apolitical store of value, many of these centralized points of contact are beginning to creep into the Bitcoin network.

Seth For Privacy says he’s concerned about the lack of privacy on the Bitcoin network today, particularly as it was a key cypherpunk philosophy that prompted the creation of Bitcoin in the first place.

“The primary issue is that the incentives of the network are changing,” Seth For Privacy adds. 

“If the majority of the money and influence in Bitcoin has a perverse financial incentive to remove privacy of the individual and retain power for themselves, we are likely to see less funding and resources being poured into improving Bitcoin’s privacy or self-custodial tech.”

However, Citrea co-founder Orkun Mahir Kilic takes a more balanced view.

“Bitcoin itself is inherently resistant to external influence,” Kilic tells Magazine. He says the relationship is reciprocal and that TradFi is beginning to recognize the value of Bitcoin. 

“That said, they rarely engage with Bitcoin in its purest form (e.g., self-custody). Instead, they often adopt custodial solutions, which in turn creates demand for centralized and custodial tools. This demand influences developers to focus on building such tools, thereby creating a cycle of mutual influence.”

Kilic’s Citrea, which is building a zero-knowledge tech-based layer-2 (L2) network on top of Bitcoin, wants to help scale the adoption of Bitcoin in a way that allows holders to retain possession of their private keys, unlike ETFs and Bitcoin treasury companies, which don’t offer real custody of Bitcoin.

“If a majority of people rely on custodians or ETFs, transactions will occur at that layer without ever touching Bitcoin’s mainchain.”

“This lack of onchain transactions means fewer transaction fees, which will become a critical issue as block rewards continue to halve, he says. 

Many observers have noticed that blocks have been somewhat empty lately, despite Bitcoin hitting new all-time highs and “spam” use cases such as Inscriptions. 

Kilic adds that there are also well-documented risks that come with centralized custody, such as with FTX and BlockFi, which went bankrupt in 2022.

Bitcoin and TradFi are evolving together

Moukhtarzade from 21Shares agrees with Kilic that the influence goes both ways.

“It’s a bidirectional dynamic,” Moukhtarzade says. “Bitcoin has undeniably shaped narratives in TradFi and policy circles, from El Salvador’s legal tender move to the global ETF race pushing institutions and governments to take it seriously. At the same time, TradFi’s entry via ETFs and regulated custody solutions is influencing Bitcoin’s perceived legitimacy and utility, especially for institutional portfolios.”

“We’re witnessing convergence: Bitcoin is forcing TradFi to evolve, while TradFi is institutionalizing Bitcoin.”

Bitcoin purists, however, don’t like the idea of bringing the same old custodians back into the mix. Still, Moukhtarzade argues that large-scale institutional products need regulated custodians to meet compliance, security and investor protection standards.

“While this introduces a degree of custodial centralization, these platforms also undergo rigorous audits, employ best-in-class cold storage, and are held to a high fiduciary standard, something that’s not guaranteed in retail self-custody.”

Moukhtarzade says custodians such as 21Shares and the rest of the ecosystem have a responsibility to preserve Bitcoin’s foundational values, offer technical neutrality, and support user choice.

“Long term, we believe diverse custody models from ETFs to decentralized custody protocols should coexist, empowering users across the spectrum from passive holders to active network participants,” he adds.

Not perfect, but a better system overall

So, what happens going forward? For now, there is a widening division between Bitcoin purists and those open to TradFi centralization.

As Magazine noted earlier this year, there is an argument that centralized TradFi will end up eating much of the activity that is currently considered decentralized finance (DeFi).

Some say a worst-case scenario would be a Bitcoin equivalent of Franklin D. Roosevelt’s Executive Order 6102, which prohibited citizens from hoarding gold.

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But traditional financial institutions and the governments that regulate them also have good reasons to support a decentralized Bitcoin, whether it be for protecting the asset’s underlying value proposition out of greed or simply earning votes from local constituents.

The positive aspects of TradFi’s involvement in Bitcoin cannot be ignored either. Despite the centralization involved with ETFs and other custodial options, they also effectively allow millions of people to gain Bitcoin price exposure without having to pay an onchain fee or learn about wallets and seed phrases.

“[Things] can rapidly change as mining becomes more industrialized and regulated, governments pursue prosecution against open source developers, and much more,” warns Seth For Privacy. “Thankfully, there are ‘shadowy super coders’ who will keep building powerful tools regardless, but it’s still something to keep an eye on.”

Kyle Torpey

Kyle Torpey has been covering Bitcoin and crypto since 2014. Notably, he covered Bitcoin’s blocksize war at Bitcoin Magazine and Forbes. Over the years, his work has also been published in Fortune, Vice, Investopedia, and many other media outlets