In September 2008 the great financial crisis started. In October 2008 Satoshi Nakamoto released a white paper that explained bitcoin and the ledger that uses blockchain technology and the vision for one currency for the world using the Internet of Value.
Bitcoin, as opposed to fiat currencies, is a decentralised digital currency that enables instant payments to anyone, anywhere in the world. Bitcoin uses peer-to-peer technology to operate with no central authority or banks recording the transactions in the blockchain ledger maintained on the Internet of Value.
DON’T TRUST, VERIFY
The fiat system (money backed by a central bank) is based on trust − trust in politicians, bankers and bureaucrats. Unfortunately, this trust has been broken many times over and we need to find better foundations for our monetary system.
The whole financial system is ledger-based, except for cash, and bitcoin’s properties as a ledger make it a far superior monetary system to anything in existence.
A ledger should be verifiable, reliable, global, accessible, trustworthy and able to provide final and irrevocable settlement in real time. The current system is flawed as it is corruptible, inaccessible to many and always behind silos and wall gardens. Also, it is difficult to interoperate and relies on many intermediaries for trust and verification.
The bitcoin ledger, where all transactions are recorded from the first one ever made, is available for anyone to see: it is transparent and immutable. Once the transaction is recorded on the ledger, it cannot be altered, thus ensuring the integrity and accuracy of the transactions.
This bitcoin ledger is also global as it uses the Internet of Value. It is accessible as anyone can download a wallet and acquire it or sell it without asking permission; it is trustworthy as it is transparent and verifiable in real time and provides final and irrevocable settlement in real time.
Finality in real time is the holy grail of financial markets, but it was only achieved through the use of costly intermediaries like central securities depositories, custodian banks, stock exchanges, brokers and central banks. However, settlement still takes one to three days.
When can anyone have access to the ledgers of your bank or any financial institution? Even the central securities depository Strate does not have access to the complete ledger of all transactions on the JSE. The issuer can never know real time who is buying or selling its shares. The investor cannot have a detailed combined statement of account in real time of all the transactions, particularly if trading happens through different brokers.
There is a reliance on auditors and regulators to ensure that the ledgers of the financial institutions we trust are accurate, as they are not transparent. Audits have proven to fail, because when there is collusion, there is no way of detecting fraud and corruption.
All transactions in bitcoin are visible to all parties, increasing transparency and trust, and blockchain technology can increase the ability of regulators to supervise the flow of information, which is tamper-proof.
As the ledger has the complete audit trail of all transactions, it allows the tracking of ownership and movement of any assets from loans to supply chains in real time.
As bitcoin is decentralised, there is no single point of failure. Nothing can stop bitcoin from existing − as we have seen, when China banned bitcoin there was no impact on the protocol or the value of the currency.
Bitcoin has never been forged, double-spent, or hacked. Everything else that lives in the digital realm has been tampered with at some point, including Microsoft, the CIA, banks, or Google.
The blockchain ledger of Bitcoin is immutable, because every block on the blockchain depends on its predecessor. The ledger therefore has a complete audit trail. Blockchain is decentralised, as it is not controlled by any single entity.
Bitcoin transactions are:
- Permissionless and borderless − The software can be installed by anybody worldwide. The fiat banking system is a permissioned protocol that allows the state to confiscate property for whatever reason.
- Anonymous − Bitcoin does not require any ID to use, making it suitable for the unbanked.
- Censorship-resistant − Nobody is able to block or freeze a transaction of any amount. We have so many examples over the years where fiat currencies in banks have been abused by authorities. Some examples are:
- Argentina with 100% inflation and capital controls
- Greece, where the banks limited the withdrawal of funds for years
- Canada, which stopped the bank accounts of those supporting truck drivers that were protest
- Fast − Transactions can be made almost as fast as data can travel over the Internet.
- Cheap − Fees can be very low, as it uses the Internet and not mainframes. As there are no intermediaries, the costs are insignificant in comparison to the currency financial system.
- Irreversible once settled, like cash.
- Online and available 24 hours a day, 365 days per year.
- Bitcoin can also be a store of value; some have said it is a ‘Swiss bank account in your pocket’.
- It cannot be printed or debased − Only 21 million bitcoins will ever exist.
Bitcoins have no storage costs like gold and cash do. They take up no physical space, regardless of the amount. And bitcoin is more portable than gold and real estate, and easier to carry than cash.
PROTECT YOUR OWN ASSETS
Bitcoin allows self-custody in hot and cold wallets. Cold wallet storage, where only you control the private keys, is extremely secure. It is the safest private property you can own and the only one in which the cost of misappropriation usually exceeds the reward. Again, you don’t need to trust anyone, just yourself and your ability to follow the correct procedures.
It can be stored on a phone, computer, encrypted on a paper backup or memorised in your head.
Not your keys, not your crypto. Don’t leave your crypto with a centralised exchange or with any intermediary. Become your own custodian.
COUNTERPARTY RISK WITH THE BANKS
Every time you rely on a third party to do a transaction, save, or invest your money, you are running a counterparty risk.
However, you don’t want to give your money to a middleman and run the risk of being rug-pulled by the new FTX, Celsius, or Terraluna crooks or their equivalents.
When you deposit your money in a bank, you have a counterparty risk to that bank as they use your money to invest in risky businesses: The banks take our deposits, which are liquid, and invest them in risky non-liquid investments − for example in equities or long-dated bonds in a corporate − making our deposits exposed to failure of the bank in managing their own reserves. If there is a run on the bank and the bank goes into bankruptcy, in countries like ours where there is no deposit insurance (soon to be implemented but it’s not clear how much will be the limit of cover), the deposits are not recoverable.
Banks can meet the growing demand for faster, cheaper and more efficient payments by using decentralised blockchain technologies relying on the Internet of Value without wall gardens or intermediaries like swift, automated clearing houses, or other payment technologies based on mainframe hardware.
INCREASED EFFICIENCY REMITTANCES AND CROSS-BORDER TRANSACTIONS
Bitcoin can be sent anywhere in the world within minutes at nearly no cost. That is why El Salvador, where 70% of the population is unbanked and dependent on money transfers from overseas, made bitcoin legal tender, together with the US dollar.
This cannot be said of the banking system − especially for cross-border remittances which are slow, rely on many intermediaries and are costly.
We need a digital currency that is both neutral and transparent, permissionless and decentralised, with an immutable protocol and a fixed supply. Bitcoin is the closest thing we’ve seen to true global money, and this is a big deal in a world that is becoming borderless.
OPPORTUNITIES TO INCREASE REVENUE AND BANK THOSE LEFT OUT OF FINANCIAL SERVICES
Two billion people are unbanked with another four billion underbanked.
Banking is a permissioned business that only the elite can afford. Bitcoin is banking for everyone: no permission, no KYC, no ID, and no pedigree is required. For the global south, Bitcoin is the only hope. Help them bank themselves.
The main reason for these restrictions is permission.
For the first time ever, everyone regardless of creed, social status, or wealth can access the bitcoin ecosystem and transact value peer to peer without anyone’s permission. This opens a myriad of possibilities not only for the global south but also elsewhere.
Smaller businesses would be opened up to opportunities to have a major impact on the world and take their business from a local market to a global and universal market. Bitcoin would even eliminate the need for country- or region-specific currencies like the BRICS currency that is being considered at the moment.
Transactions with anyone in the world could be instant and businesses would interact overseas just as effortlessly as they would if they were direct next-door neighbours.
HOW CAN YOU PREVENT DIGITAL MONEY FROM BEING SPENT TWICE?
Satoshi used proof of work, the blockchain, and the consensus protocol to achieve this, with a brilliant and elegant solution.
But guess who hasn’t bothered to do the same? Central banks, governments, banks. Through fractional reserve and the rehypothecation of assets, they are effectively selling the same stuff many times over and they are even selling stuff they’ve never owned.
No wonder we see bank runs, financial troubles, and economic collapses ever so often.
STORE OF VALUE
Gold and other assets have an elastic supply, but not bitcoin. Any significant increase in the price of the precious metal will trigger an increase in supply. Mines that are not currently being exploited will suddenly become profitable once the price changes.
Bitcoin has a supply that is predictable, fixed and independent of price. Bitcoin is a store of value, as it has an asymmetric return compared to any asset class even better than gold.
When you hold bitcoin, you actually own the asset rather than having a liability that is (hopefully) backed by a bank’s loans and other securities. With bitcoin, the nominal value of your bitcoin cannot disappear due to loan defaults, interest rate rises, or bank runs. Bitcoin’s supply is finite, so it cannot be debased. And bitcoin is far less likely to be censored than any system where banks and/or governments are the gatekeepers, because there is no single party in control of which transactions get approved or rejected.
Bitcoins have all the desirable properties of a money-like good. They are portable, durable, divisible, recognisable, fungible, scarce and difficult to counterfeit.
Crypto assets create the possibility of building a parallel, reliable financial system which is functional, open, and independent of governments or unaccountable corporations. Bitcoin, for example, is a system of accounting that is both decentralised and censor resistant. This means that as an economic measure and store of value, bitcoin is the least corruptible. Also, bitcoin provides more value, stability and security than any current centralised government-backed currency/asset.
Institutions are starting to buy into this asset class. For example, MicroStrategy and Square become the first publicly-traded companies on major stock exchanges to allocate some or all of their reserves to bitcoin instead of cash.
Satoshi Nakamoto’s brilliant invention deserves a Nobel Prize in economics.
What better role model than Satoshi himself being the ultimate sacrificial hero − he, she or they spent an age building bitcoin from scratch, released the code, ran the project for a brief time, and then stepped away, permanently. The coins Satoshi mined − out of necessity to support the network when no one else would − were left untouched.
Bitcoin represents a fundamental shift in how we see the economic activity in the world. This has been made possible by a combination of computer science, cryptography and economic incentives. We will all eventually realise that bitcoin is a general-purpose technology and a global infrastructure that can resolve many of the issues in financial markets that keep in getting us into crisis.
With bitcoin you can opt out of the fiat currency and fractional reserve banking by solving the core trust problems:
- It offers security against inflation by using a fixed supply. Only 21 million will ever be issued.
- It offers security against the seizure of your money by using your own private keys or seed phrases to control your funds. Bitcoin is a fully self-sovereign system and due to it being distributed, it cannot be shut down. It exists on its own merits purely because people believe in it.
- There is privacy of payments by using pseudonymous identities. With bitcoin, you don’t need to disclose your name or other personally identifiable details. New technology is being developed to improve privacy.
- There is freedom against censorship by using peer-to-peer networks.
Bitcoin was not invented for profits, but to change the world. It will become the biggest transfer of wealth in our lifetime, so you might want to consider owning some sooner rather than later.
With bitcoin, every transaction is verified in real time for all to see by a secure network of tens of thousand of computers running unhackable software − a world where verification in a decentralised environment with full transparency will increase the trust that has been lost since the financial crisis in 2008.
I ask the reader not to dismiss this innovation that will change our understanding of finance and record-keeping but to start by reading the white paper creating bitcoin by Satoshi Nakamoto. Ass the reader understands it better, his or her appreciation will increase and the implementation of this idea whose time has come will become ubiquitous.
Professor Monica Singer CA(SA), South Africa lead and senior strategy for Consensys