The revolution will not be BitCoin

BitCoin will never be mainstream. BitCoin does not allow for the financial products that are vital to our societies, business and personal lives. BitCoin is a great step towards a distributed and fair financial system, but it is only a distributed ledger of realised wealth, it can not represent the complex economy of the developed world.

We need credit

Credit, the concept of borrowing money from others, is necessary for the societies, business and lives that we live in the western world. We earn most of our money in the middle of our lives, but borrow money in the beginning to pay for tuition and houses and cars. We then rely on investments in the autumn of our lives when we are no longer able to hold a job. The same goes for most businesses, they will need to borrow money to start up, then they will generate profit and that profit will be accumulated and invested to secure the business when products retire. For credit to work, we need to be able to issue it on an ad-hoc basis, that is what forms the monetary system.

We need identities

In order to invest and borrow money we need to have a mechanism for trust. Identities and the rule of law is what makes the financial system work. We guarantee our loans with our names and we use our names to nominate the beneficiary of our investments such as pensions plans. The rule of law in our societies make sure that those identities match to individuals and that contracts are guaranteed.

We need the rule of law

The financial contracts that we enter into, such as credit cards, mortgages and pension plans are guaranteed with laws, courts, and police. Without these forces there would be no reason to expect other people to pay you.

Money today and in the future

BitCoin has a finite amount of money available, which needs to be mined over time. The early adopters are now very wealthy just because they were there first. No society has accepted that premise for wealth distribution.

Since there is only a finite amount of BitCoin available, the system will get out of balance and cause deflation, if the amount of value represented in the BitCoin system outpaces rate of coins being mined.

BitCoin is designed for that to happen, it will be exponentially harder to mine coins over time. This is a concious decision to avoid inflation, but it ignores the injection of value in the system from people using it to exchange goods and services.

No Credit

Because BitCoins are mined, and there is no way to represent debt and credit, value can not be exchange for future repayment.

Without the availability of credit, new generations of people and business have no access to capital and will have no way of establishing themselves in a developed world were you rely on services from others.

In our current financial system, any two parties can enter into a financial contract and exchange credit. That is how the financial system provides money. When your bank lends you money, it has no great gold reserve that it digs into and hands to you. All the bank does is to take note our your arrangement. Now, there is more money in the system. Not because the bank mined the money, but because you entered into a contract to owe the bank. When you use the money, it is sent from your bank to the recipients bank, that bank trusts your bank, and so they “clear” the transaction between them. When the transaction clears, the recipient of your money is no longer concerned with whether you are “good for the money”, in other words, whether you honour your contract with the bank.

BitCoin is not the solution

There is no rule of law on the internet, and BitCoin only lives on the internet. There are already many known ways to attack the BitCoin network and actors in it.

BitCoin has no fixed identities. At any point in time, people are free to create new identities and abandon old ones, they can use a single identity or thousands.

BitCoin can not provide credit. We may build credit business around BitCoin, which will be based on traditional identities and use BitCoin simply as a ledger, but there will be no way to lend monies that are not already mined.

The consequence is that credit cards, mortgages, car leasing and bank loans will not be available. Without the ability to provide credit, there is no way to invest in other people or in businesses, so there is no way to establish passive income like pension plans.

For now I regret to conclude that crypto currencies provide no mechanism for credit and relies on a unfair pyramid structure of wealth. BitCoin will not be mainstream, and we will have to rely on a system of governments, clearing houses and big banks to regulate the distribution of money.

Full disclosure

I am educated in finance and software engineering, and have made a career in the financial industry, engineering software systems, mainly trading platforms.

Written by Vincens Riber Mink on 04 October 2015