Bitcoin and Money. Bitcoin as an alternative to conventional money

Bitcoin is both a payment network and a form of money that exhibits unique features that are counter-intuitive for most of us, given our everyday experience with money. It is a borderless money. It is programmable money. It is money that cannot be easily confiscated or seized by governments. It is money that falls outside of any regulatory and legal framework humanity has devised to date. It is money that does not see jurisdictions or country borders, and that cannot be contained by foreign exchange regulations.

The Bitcoin payment network provides a system of trust for senders and receivers of money that does not require a bank or regulatory authority. The payment network is not owned or controlled by any authority or legal entity. There is no legal entity that can be legally shut down in an attempt to shut down Bitcoin.

Bitcoin, and not the blockchain, was the real revolution. It is the most significant advancement for a society that was borne from Computer Science since the advent of the Internet.

In this article, it will be shown how Bitcoin is not subject to the flaws of conventional monetary systems. This article will also touch on why Bitcoin is so revolutionary and seemingly ‘unstoppable’. Refuting the typical arguments against Bitcoin, such as the power consumption, its volatility or the “slow transaction speed”, will not be touched upon in this article. These important topics will, however, be the subject of future articles.

As alluded to in Part Three (more detail can be found here), commerce and transactions across the globe has come to rely on many different co-dependent financial institutions (central banks, banks, correspondent banks, etc.), credit card companies, payment processors, SWIFT, etc., all of whom introduce costs for the role they play in processing payments.

In addition to the complexity and costs involved, successful commerce requires trust:

• Successful commerce requires that banks and central banks are trusted by society (which is why the regulation of large institutions is required, to engender this trust);
• In fact, the nature of the payments system is such that everyone, from the payer to the payee, and all payment facilitators in-between, needs to be trusted. To ensure this trust, all kinds of control measures such as KYC (Know Your Customer), AML (Anti-Money Laundering), ID&V (Identification and Verification), etc. are required to enable payments.

Bitcoin (the uppercase ‘B’ means we are referring to the Bitcoin payment network) was the world’s first successful attempt at creating a peer-to-peer form of money (the lowercase ‘b’ means we are referring bitcoins as the currency) transmission, where:

• No intermediary or financial institution is required; and
• No one individual or authority needs to be trusted ensure successful payments.

The Bitcoin payment system provides the trust that payments can be made by anyone, without having to know or trust anyone else on the system, or without needing an overarching authority to provide the necessary trust.

In the process, it can reduce the costs of transactions. It allows anyone to participate. It does not require you to provide KYC documentation, pay a monthly fee or be of a certain age the way banks would require.

Unlike fiat money that can be ‘printed’ and ‘unprinted’ by central banks or treasuries, the supply of Bitcoin is fixed, unchangeable and not subject to the influence of authority. This is very different to other cryptocurrencies where the money supply or even the inflation rate can be influenced by individuals.

Bitcoin, therefore, solved the inflation problem. Bitcoins are inflation-resistant digital assets that cannot be copied. Everything digital we have come to know (a song, picture, or an email) can be copied. Bitcoins cannot be copied. When you send someone an email, you still keep a copy. Not with bitcoins. When you send someone bitcoins, you no longer have a ‘copy’ of it.

It is not a version of payments that we already are familiar with (PayPal, Zapper, etc.). It is not a payment system that is built on top of existing payment infrastructures such as those of banks, SWIFT or card networks. Bitcoin does not need or need to interface with any banking system to function.

This aspect makes it fundamentally different from solutions such as Ripple, Libra or central bank digital currencies for example. Ripple still needs to interface to the existing banking infrastructures that are old, disparate, non-standardized, costly and difficult to innovate on top of. With Bitcoin, payment applications can be built without being constrained by or having to retrofit anything into these traditional, legacy systems.

Bitcoins do not have a physical location. Bitcoins live on the blockchain, which is a global, decentralized, jurisdiction-agnostic distributed database. The blockchain is global, and even though a physical location is nonsensical in a virtual world of bitcoin addresses, you can think of the bitcoins as already being ‘everywhere’.

As a result, Bitcoin does not fall under the auspices of a particular government or regulatory authority. It is immune to foreign-exchange limitations that are enforced by financial regulators. Bitcoin gives you an exit from the ‘captive market’ that some countries’ regulations enforce (as discussed under Financial Repression). The regulatory limits on the amount of money you can invest offshore cannot be applied to Bitcoin.

How is it possible that bitcoins cannot be regulated, restricted, controlled, seized or otherwise censored by any government? How is it possible that bitcoins do not fit into the conventional notions of country borders and are immune to foreign exchange or currency control regulations?

To answer these questions, we’ll first need to revisit the Bitcoin blockchain and the nature of bitcoin transactions. Thereafter, we can justify the economic and geopolitical ramifications of this new currency.

As pointed out earlier, bitcoins do not have a physical location. Bitcoins live on the blockchain, which is a global, decentralized, jurisdiction-agnostic distributed ledger. Your bitcoins already are ‘everywhere’.

Bitcoin wallet software gives the impression that satoshis are sent from and to wallets, but bitcoins really move from transaction to transaction, and these transactions are stored on a global blockchain. Each transaction spends the satoshis previously received in one or more earlier transactions, so the input of one transaction is the output of a previous transaction. The outputs of a bitcoin transaction effectively specify the number of satoshis available to be spent, and who is able to spend it. Only someone with the right public/private key pair will be able to unlock the bitcoins in the output and spend it onward.

Furthermore, even though your wallet gives you the impression that you have a certain number of bitcoins on your mobile device or hardware wallet, you do not actually have those bitcoins. What you have are the cryptographic keys that enable you to spend bitcoins that are locked up in a transaction output that is stored on the blockchain.

So when you and your hardware wallet travel between countries, you are not actually taking ‘bitcoin money’ with you across country borders.

To be technically correct, there is no such thing as transmitting or physically moving money in the world of Bitcoin. When you and your hardware wallet travel to another country, the unspent transaction outputs are already ‘there’. It is already ‘everywhere’.

Bitcoins are therefore always global, and when you transact with or ‘send’ bitcoins to another recipient, all you are doing is declaring a change of ownership (which is validated by the entire network) of the bitcoins that already are on this global network. The bitcoins themselves do not actually move in any physical sense.

Therefore, all the laws and legal frameworks around money transmission (such as those for Money Transfer Operators) do not apply to Bitcoin, because with Bitcoin we are not transmitting money!

Bitcoins are a form of money that is completely independent of the underlying transport medium. A bitcoin transaction is a digitally signed data structure that can be transmitted on various transport layers or communication media such as email, SMS or Facebook, not just the Bitcoin payment network. All the transaction needs to do is reach the miners somehow to eventually be included in a block.

Furthermore, the communication medium does not even have to be secure because there is nothing sensitive in the bitcoin transaction itself. The security of the bitcoin transaction comes from the rightful ownership of the public/private keys and the proof-of-work consensus mechanism.

It is different from credit card transactions…

In contrast with say a credit card transaction at a point of sale device, your actual credit card details (card number, expiry date, CVV code, etc.) is what is being transmitted via the device and all the intermediaries until it gets to the card-issuing bank for authorization. That information is sensitive, and if it was intercepted and decrypted somehow, the credit card holder’s account would be compromised. Stringent PCI DSS (Payment Card Industry Data Security Standards) implementations are meant to minimize this risk, but the point is that unlike a bitcoin transaction, what you are transmitting to the issuing bank is the actual sensitive data.

Credit card information is also stored at various points along the payment chains. And we have seen numerous examples of how card information has been compromised. Not always because the participants in the payment chain have been delinquent, but because a sufficiently motivated hacker or criminal will eventually find a way to obtain this information. Credit card data effectively are the access codes to your accounts.

Bitcoin transactions are fundamentally different. The transactions that are being transmitted are not the ‘access codes’, just digitally signed messages. The transaction is an authorization for who can spend an unspent transaction output on the blockchain. The transaction contains no sensitive data. If you intercept this transaction, all you will know is which address the money is coming from, which address is able to spend it, and how much can be spent. The signatures reveal nothing. The addresses reveal nothing. Even if you did intercept the transaction, you cannot modify the transaction because every part of it is included in the signature (technically though, Bitcoin does allow parties to a smart contract to modify certain parts of a transaction using SIGHASH flags and ANYONECANPAY modifiers).

Therefore this transaction can be transmitted via any unsecured communication medium. Nothing in the message can be compromised. The transaction is separate from the transmission medium so that it does not depend on any underlying security. All we need is for the message to reach one node in the bitcoin network. From there it will be propagated to other nodes and validated by the network.

Because bitcoin transactions are non-compromising data structures that can be transmitted in various formats, using a variety of communication mechanisms at our disposal, it is not practically possible to ban bitcoin transactions or to place cross-border restrictions on them. At least, not without violating your basic human rights.

Bitcoin, therefore, is a type of money, the ‘transmission’ of which no different to the transmission of data. Today, we have too many interconnected communication mechanisms and social media for any authority to practically attempt blocking the transmission of bitcoin transactions.

This also has implications for underdeveloped economies where Internet connectivity is lacking, but where radio or SMS/GSM can be used.

Regulation can most certainly be enforced where Bitcoin meets fiat, for example on a cryptocurrency exchange. Cryptocurrency exchanges can be regulated. They can be legally shut down. But what is being regulated or shut down is the interface or intersection of Bitcoin and fiat money, not Bitcoin itself.