Bitcoin was created above all to bring into the digital world what happens in the material world: the possibility of exchanging value directly without resorting to a trusted intermediary.
The second reason, expressed in the whitepaper, is to generate totally irreversible transactions , avoiding fraud against those who accept payment in cash in exchange for goods/services, without resorting to a reliable intermediary, which is not possible with previous technologies. In reality, Bitcoin was also created for other reasons, which we will try to analyze here.
The current monetary system has serious problems, some potential, others tremendously current, especially if we consider the digital value exchanges of the so-called cashless society.
I usually divide these criticalities into three macro-categories or types:
- technical issues
- political issues
- economic issues
In this table I have collected the main features of the fiat cash system, ie legal tender currencies in the form of cash, cashless currencies, digital legal tender currencies, and Bitcoin.
Let us analyze these characteristics and the critical points linked to them.
Let's start with the technical aspect. Although of crucial importance, it is barely taken into consideration, especially by the press or by those who "are not in the sector", who is not interested in Bitcoin for the moment and/or have not had the opportunity to study the network's protocols.
We have already described the current digital payment system: we have a centralized type system in which two actors (in our example Bob and Alice) turn to a "reliable third party" (the bank) to make a transaction that, with cash , would instead be direct (Alice pays Bob. Done).
Where are the technical issues?
The system described above is centralized: an attacker, such as a hacker, could hack the bank's server and take possession of Bob's money sent by Alice diverting the transaction to another recipient. He could also appropriate the money of both, changing the bank register.
Science fiction? Not really, perhaps a little paranoia. But analyzing the potential threats to the system is a necessity proper to those who create those systems (developers and systems engineers) and those who study and disseminate them.
We should not think of the centralized system as exposed only to external attacks: internal threats should also be considered. These are not necessarily voluntary attacks on the network, but can be technical problems of a more serious nature.
On June 1, 2018, Visa suffered a heavy interruption of the service[2] which caused the impossibility to execute transactions on the circuit in the UK and in the rest of Europe.
Millions of users were prevented from making payments for several hours: an important damage, especially if we consider that individuals also use electronic payment systems to purchase basic necessities. Real panic arose, which even forced some governments to issue reassurance notices to citizens.
"Don't worry! If you can't pay, you haven't suffered any theft or hacking" The Spanish Guardia Civil reported on Twitter.
Ironically, it was discovered that users could not make transactions through the Visa circuit but were still able to withdraw cash from the ATMs[3].
A week later, the "rival" Mastercard system suffered a similar crash[4].
Two months earlier, Mastercard recorded downtime in the United States[5].
As rightly noted by the economic journalist Brett Scott in the article published by The Guardian entitled "The cashless society is a con – and big finance is behind it"[6]
"Digital systems may be "convenient", but they often come with central points of failure. Cash, on the other hand, does not crash."
Indeed, the concept applies to both banknotes and Bitcoin, a digital cash system.
Think of it. In its ten-year history, Bitcoin records an uptime of 99.985%: the only two events that caused a temporary interruption of service (in 2010 and 2013), occurred at times when the network was in its infancy and the number of nodes that supported it were very limited, demonstrating that networks tending to centralization (or centralized, such as "classic" systems) are more subject to systemic crashes.
Today, more than 9,000 nodes (according to Luke Dashjr there are actually more than 60,000 nodes!) actively supporting the network and there are more than 10 different implementations of the software running on these machines; this drastically reduces the risk of a system collapse.
However, the probability that this will happen for a centralized system such as Visa is still considerable.
So we have a classic digital payment system that is highly reliable in terms of practicality and, in some cases, speed, but is potentially attackable and subject to technical downtime due to the intrinsic centralization of the system.
These systemic attacks or crashes could lead to devastating damage.
Critical issues of a political nature
These critical issues are usually the most addressed, because politics is passion but also, too often, the imposition of one's will on others.
The example described above is useful, but this time we modify it a little.
Alice wants to send money to Bob, a friend of her, and she uses the reliable third party; the transaction is not authorized. The bank believes this movement of money is suspect so it intervenes in advance to prevent money laundering or tax evasion.
"Very good!" someone will say. It turns out, however, that Alice and Bob have done nothing wrong, and that the transactions sent by Alice to Bob take place without the latter providing off-the-books goods or services to her friend.
Let's see a second example.
Alice wants to send money to Bob, in exchange for a certain product, and resorts to the reliable third party. Also this time the transaction is not authorized.
The reason?
The bank considers the good offered by Bob "not positive" for Alice and acts to prevent the purchase, stating that it wants to "protect" its customers. The reliable third party has acted preventively on transactions of private citizens who do not carry out any type of tax offense.
These are not examples in the air and certainly do not represent a serious case of paranoia.
Here a recent example:
This person wanted to buy cryptocurrencies on CashApp and Coinbase using his debit card provided by Well Fargo, one of the four big US banks. The transaction was rejected because:
"Well Fargo does not allow transactions involving cryptocurrencies."
You understand that this is a political choice that limits individual freedoms.*
At this point there are those who say: "We want to protect the customer from potential scams and highly speculative investments." To which I reply: "Are we users capable of judgment? Why do we need protection?".
Some realities see this centralization of the system as a way to strengthen competition in financial services but also to tackle money laundering and tax evasion. In this sense, banks, refusing to authorize transactions related to the "crypto world", would avoid being facilitators in case of crimes involving transactions through Bitcoin or other cryptocurrencies[7].
Others claim that digital payments protect consumers from being robbed or losing money[8].
In the example above, the problem could be solved by changes to the internal policy or, more radically, by changing banks.
What if "the attacker", is the State?
Wikileaks is an international non-profit organization, known for its activism in the field of clear-text sharing, through its website, of classified documents. Over the years, this organization has spread many confidential documents, including some containing information on the management of the Guantànamo prison camp, which caused a scandal given the repeated violations of the Geneva Conventions perpetrated within the detention facility.
In 2011, following the publication by Wikileaks of confidential documents concerning the war in Afghanistan, the main payment processors, through which the organization collected donations, decided to freeze access to funds and prevent future donations through them.
Among the many providers, Paypal, under growing pressure primarily from the United States, alleged that "[Paypal] cannot be used for activities that encourage, promote, facilitate or instruct others to engage in illegal activities"[9].
Following these unilateral initiatives, Wikileaks decided to accept donations through Bitcoin and communicated it through a tweet.
On this address it received more than 4,000 bitcoins.
Money Control and State of Surveillance
A centralized monetary system implies the potential realization of the Surveillance State, the main characteristic of totalitarian regimes.
A form of cash, better if sound money , such as gold or bitcoin, is a tool that guarantees the privacy of the individual who uses it; privacy is fundamental, especially if you live in authoritarian regimes or in countries that, to deal with a financial crisis, actively intervene on the citizens' wealth through measures called " Capital control", limiting their free initiative.
In 2009, the world crisis that began the previous year in the United States, struck down strongly on the European Community and Greece paid the price more than many other countries.
According to the former prime minister George Papandreou, previous governments falsified budgets to allow Greece to enter the Euro. In 2015, perhaps the most serious year for the Greek economy, the credit institutions were closed by order of the government and, at their reopening, cash withdrawals were limited to 60 euros a day in order to avoid the total collapse of the banking system[10].
At the beginning of September 2019 the Central Bank of Argentina announced further checks on money in an attempt to tame speculation and stem a steadily growing debt spiral. Citizens who purchase foreign currencies are required to take an oath: they declare to wait at least five days before buying bonds using the newly purchased foreign currencies.
The reason is soon said: it was customary to buy bonds with dollar and then sell them in pesos and get a profit of around 5%.
This measure follows the limit of money in foreign currency that each individual can buy, amounting to 10,000 USD per month[11].
In addition to capital control and therefore to direct money control measures, the State can also activate surveillance systems on the population by exploiting the intrinsic characteristics of centralized digital payment instruments.
In Hong Kong, the summer of 2019, a political protest was held several times in contrast with the Chinese influence on the governance of the special administrative region.
This time the casus belli related to an amendment to the extradition law which, if approved by the Parliament, would actually have allowed China to carry out the trials of crimes committed in Hong Kong[12].
Common Law, a legal system different from that in China, is in force in Hong Kong. The protest therefore wanted to prevent part of the judicial power from being transferred to another State, with another legal system. Hong Kong was one of the first countries in the world to introduce a cashless payment system: in 1997 the Octopus card by Octopus Holding was launched, a solution that avoided the use of cash for the purchase of tickets for public transport, including MTR (Mass Transit Railway Corporation). Octopus cards are now actively used also for different purchases, in grocery stores, car parks and other places but also for safe access to homes, schools and offices. The MTR is the majority shareholder of Octopus Holding.
Guess who owns over 75% of the Mass Transit Railway Corporation?
Exactly, the Hong Kong government. The government is the majority shareholder of Octopus Holding, which manages the Octopus card and therefore collects data on the transport, consumption and security of citizens' private homes[13].
Why this preamble?
Citizens, fearing that their card data could be traced and used as evidence of their participation in the protests, started buying disposable tickets for public transport instead of using their Octopus card. This fear is more than justified by a precedent: the police had used similar tracking techniques during the 2014 protests organized by the pro-democracy movement called Umbrella and had exploited them in court against the main protest leaders[14][15].
You will understand how a centralized financial instrument lends itself well to state control over citizens' political activities, especially if this turns out to be a non-democratic regime.
According to a recent study by the Human Rights Foundation (HRF), the world currently has just over 100 democracies that govern over 47% of the world's population; 40 authoritarian regimes that govern 1.2 billion people and 53 full-fledged dictatorships that oppress 2.8 billion people or 30% of the world's countries[16].
Let us return to considering the activity of the third party, in this case the State, on monetary policy and we arrive at economic issues.
Economic issues
The first thing we need to analyze is the potential, indeed, almost certain, lack of fungibility in an exclusively digital monetary system.
We have said that the third party can also intervene preventively and block transactions between two individuals (peer-to-peer) or between an individual and a private company (peer-to-business). Not only that, it can also reverse a transaction and possibly seize the money. This is apparently good and right if this money comes from an activity such as drug or human trafficking. But what if this money came into the hands of people who have nothing to do with these crimes?
They could be deprived of money considered "dirty".
The reversibility of transactions is a novelty introduced by cashless systems, not present in exchanges of direct value between individuals. With reversibility, one of the fundamental properties of money is lost: fungibility.
This term indicates an asset that can be exchanged for another of equal attributed value. For example, we can exchange one euro coin for another, or we can exchange it for 100 euro cents; we can also exchange one gold nugget for another that has the same chemical/physical characteristics. In the digital realm it is difficult to guarantee fungibility in a context in which a third party can intervene and cancel transactions or seize money.
My money could be dirty and therefore not as good as yours.
Bitcoin tries to solve this problem by introducing the concept of irreversibility of transactions and excluding the third party. We will see later that this is not entirely sufficient to guarantee the fungibility of the system due to the traceability guaranteed by the blockchain.
Another economic problem is actually also political: it is in fact the economic policy of the current system. Until 1971, the global economic policy, already linked to the Dollar, was essentially based on the Gold Standard. The banknotes represented a certain amount of gold preserved in the Federal Reserve vaults and were convertible: you could go to the bank with your own banknotes and get a certain amount of gold represented by them.
In the history of the Dollar, but also of the German Mark and other state currencies, we have repeatedly intervened on this convertibility, especially in times of war, in which more cash was needed to finance war activities, but it was only after 1971, following a series of economic measures called Nixon Shock, from the name of the president of the United States then in office, that we definitively abandoned the Gold Standard and therefore the convertibility.
Since then, individual banknotes no longer represent a reserve of value but are legally imposed and produced "out of the thin air", without an underlying asset.
With Bitcoin it was decided to adopt a completely different economic policy from that of the current system, similar instead to that of the Gold Standard because it is also based on scarcity, even if digital.
In the chapter on Bitcoin's economic policy (C_an we change Bitcoin's economic policy?_) we will see in more detail what it entails.
For now it is enough to understand this: the current system does not provide a limit to the production of money and is therefore based on an inflationary model (the more money is produced, the less value the single unit has, the more prices increase), while Bitcoin adopts a limited supply system with controlled inflation.
Furthermore it must be said that the monetary policy of the State or other centralized entities, such as corporations, finds ample room for maneuver within a cashless society. In fact, the presence of physical money implies a tendency to save and to consume "convenient" goods, while digital money encourages spending.
A small side note that has more to do with marketing than with the content of this book: did you know that one of the few advertising investments on paper, still profitable for companies, are the advertising leaflets containing the discounts of large supermarkets?
Returning to the monetary policy of the State; in a cashless society individuals could no longer withdraw, of course, and would delegate to the governments and central banks the entire monetary policy of the system. The example of what happened in Greece in 2015 is in this case a clear preview.
During economic recessions, governments try to stimulate the economy by lowering interest rates, as people are likely to accumulate money to meet basic needs when a full emergency occurs. More money is produced and the one already in circulation therefore loses its value.
This happens not only during recessions, but also in a geopolitical context in which countries fight trade wars.
When, for example, the US Federal Reserve cuts rates to encourage exports, after the same has been done by China, the European Central Bank follows. A perennial inflationary spiral, in which the purpose of the single state is to have the money that is worth less, so that the other states acquire from them the greatest possible number of goods.
Due to the cashless society, individuals' savings could actually be discouraged thanks to the introduction of so-called negative interest rates.
People would pay the banks to keep their deposits instead of earning interest from them. Loans on the part of the banks and greater investments by the companies would thus be stimulated; they would push individuals to spend rather than save.
It may seem like laudable initiatives in the short term, but in the end the transformation of the individual from a protagonist of the monetary system to a pure passive consumer would be completed[17].
To sum up, on the one hand we have a monetary system that tends to the realization of the so-called cashless society, that is a society without cash in which the value between individuals is exchanged exclusively through financial intermediaries with all the issues that ensue, on the other we have a system, called Bitcoin, in which individuals exchange value directly with each other, created to drastically reduce the technical-political-economic issues of the previous system and achieve the separation of money from the State, as in the past separation from the Church has been achieved in democratic regimes based on the rule of law.
It is often complex to distinguish what is "cash" from what is not. We are led to believe that cash means "physical", "paper" and that cashless society means "digital", but this is not the case. We must ask ourselves a fundamental question: Can I freely dispose of my money?
If the answer is affirmative, then we are dealing with cash: banknotes, gold and bitcoins in our direct possession are examples. It may be material or digital, it doesn't matter. If I can dispose of the money directly, without resorting to a third party, then I have cash, a liquid asset.
If, on the other hand, the answer is negative then it is very likely that we are living within a cashless society, or are about to enter it. Money is no longer cash, but a sort of digital note or negotiable instrument provided by the third party (bank, payment processor, etc.).
It is convenient at this point to take up the comparison table between cash, cashless society and Bitcoin to realize again what this means.
"Bitcoin is an edge against monetary and fiscal irresponsibility from central banks and governments globally."
- Travis Kling on CNN, September 13, 2019
* Note, for the record, that, after the protest by the users, Well Fargo seems to have decided to allow the purchase of bitcoins and other cryptocurrencies through debit cards, while maintaining the ban on the use of credit cards.
