This article was first published on Dr. Craig Wright’s blog, and we republished with permission from the author.
There is this Bitcoin thing that doesn’t need trusted intermediaries. So, what do people do?
Well, you build a series of bucket shop exchanges, the best of which is a joke, like Coinbase, that would never survive in the real world, and then you have people hold their money in accounts on the same bucket shop exchanges, acting like old-fashioned banks. You know, trusted intermediaries. And to facilitate low-cost exchanges, settlements are made daily and offset between the various exchanges, sorry, bucket shops, settling the amount that each global exchange uses, which is similar to the way SWIFT operates.
The people behind many traditional systems and those behind systems like PayPal, such as Peter Thiel, don’t want Bitcoin. They want a controlled system that can act as digital gold, because digital gold facilitates banking in the traditional sense, and they can control it. Where Bitcoin becomes digital gold, we end up in the same scenario we saw a century ago. Most people never saw gold in their lives. Gold isn’t used for daily exchanges. It has never been.
The reality is that when you have a system that is expensive to move, it can become useful for interbank settlements, but not as a cash system for people. It works well for the incumbent system. Certain people don’t want individuals to get out of a debt-based bank system; they want to lock you in. The result is that we end up with a new version of the same old system as Bitcoin is subverted—not to deliver new innovative technology, but to be captured within the existing paradigms.
Gold and Banking
In the age of gold-backed money, people didn’t exchange gold coins. The reality is that gold rarely moved. Instead, gold would be held in banks and vaults, and the notes referencing ownership would be exchanged. The gold wouldn’t move. It was rare that gold moved out of central depositories. In the United States, Fort Knox was famous for holding gold. Such is the paradigm that many in the BTC or cryptocurrency industry want to create. They don’t want to see Bitcoin; they don’t like my invention. Rather, they want to regress to a system of digital gold, analogous to the early system that exchanged notes between trusted intermediaries.
Bitcoin radically changed all of it.
The fundamental distinction that people are not comprehending is that we no longer need intermediaries to exchange cash-based assets. And, other assets can be created that can be exchanged directly.
In my white paper, I defined a purely peer-to-peer version of electronic cash. It would allow payments to be sent directly from one party to another, without going through a financial institution or an alternative system, as people are now creating them. So when you use the Lightning Network, you are using the alternative financial system that I said you didn’t need. In particular, the methodology being developed for the deployment of Bitcoin by companies such as Square and Coinbase is designed around the capture of the market.
When you purchase coins through Square, Coinbase, or any other half-rate bucket shop that doesn’t deserve to be called an exchange, you are not innovating; you are degrading the technology. What you are doing is handing over your financial freedom to a bunch of individuals who seek to capture information about you in the same way that Silicon Valley has always hoped to do. In other words, you are not using Bitcoin; you are using an ancient form of banking that has been reintegrated into a low-grade Silicon Valley application. In effect, you are going back to the age of gold without any of the benefits of gold.
The technology that Silicon Valley pundits want you to use incorporates a traditional account-based system, one that is not secure and can be hacked easily. We have seen many hacks of exchanges over the last ten years, as they failed to incorporate any of the controls that the modern banking system has implemented. Some of it is because many of the people using the system do so for money laundering purposes. As a result, the exchange of bitcoin is not necessary for the system.
Rather, as with gold, or now “digital gold,” as some would want you to believe, the various exchanges can now operate based on monthly offsets. Coinbase, Square, and the other bucket shops that act as banks while flouting laws and removing consumer protection turn the financial system into a casino—where they act as the gatehouse to the virtual Fort Knox. They keep a record of the digital gold. But, as with Fort Knox, nobody knows what they hold. Fractional-reserve banking started with the same idea.
The reality is that such organisations retain the ability to distribute and use more coins than they truly own. And the reason for it is that nobody ever needs to move the coins. They stay within an account ledger as transfers are facilitated using separate notes. When you transfer between bucket shop exchanges, no coin needs to be transferred. Only settlement needs to occur, which is infrequent. Consequently, the innovation of Bitcoin, which lies in the purely peer-to-peer electronic cash system that allows online payments to be sent directly, has been subverted.
What we see in the BTC environment presents a regression to a gold-based bank. In fact, it is a free banking system where government regulations have not taken hold, and the bank gets to play with your money outside of controls. You won’t be paying for your coffee with BTC. The BTC network will never scale to allow you to do so. Rather, you will end up using a Square or Coinbase application that allows you to offset an entry in their accounts. In effect, you have a bank account denominated in BTC.
In the past, the banking system associated with gold ended up having notes worth far more than the amount of gold available on earth. In part, this is why the United States moved away from the gold standard, or, more correctly put, the gold exchange standard. In reality, there was never a gold standard in use. The system I’m describing was banking offset on promises of gold held in a depository.
It is the same system that people are creating in an effort to replace Bitcoin. Bitcoin threatens people. A lot of industries will have to change because of the new innovation that Bitcoin brings. As a consequence, many industries are trying to find ways to turn Bitcoin into something else. They want to make digital gold. Bitcoin isn’t digital gold.
Bitcoin is cash.
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