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Banks using the bitcoin blockchain is like putting a bird in a cage

The Bitcoin community have been educating me lately in how their currency can not be regulated.

This stems from my assertion that money was created to control people and therefore you cannot have money without government.

The Bitcoin guys tell me that once you’ve converted your currency into bitcoins, then you can trade that currency anywhere globally without government control.  Once it’s on the blockchain, the money becomes anonymous (apart from IP addresses).

So has government, the system and control failed?  Can you have an internet system trading commercially without control?

Yes, according to the Bitcoin community.

The claim that Bitcoin and other communities are trading without control.

The thing is that, as soon as their trades become visible in the physical world, the assertion that governments cannot control such trading becomes false.

Think about it.  You can trade across borders globally using bitcoin for any digital exchange of value.  Purchase music, books, movies or such like for nothing.  Well, that’s nothing new as people already get music, books, movies or such like for nothing.  It’s called BitTorrent.  The dark net and free trade of digital value exists extensively already without bitcoin.

Then we get into using bitcoin for money laundering and terrorist funding.  Well that exists already via dollar movements of physical notes.  That’s not something that changes fundamentally with bitcoin although it does become easier possibly

But when we get into using bitcoin for drugs or trading cars, clothes or physical goods, it releases control again.  After all, these goods have to cross borders physically via an import mechanism.  As soon as you have a physical import process, you have government inspectors. 

Therefore, I can see a system without government control that the Bitcoin community expound, but I cannot see a complete wild west of trading in bitcoin as the physical controls will remain in play.

Any thoughts?

Meanwhile, a really interesting exchange with the Bitcoin community about my other statement: that the blockchain is of interest, but it doesn’t require the currency bitcoin to use the blockchain.

From discussions with the banks, they are all thinking about how to incorporate the blockchain protocol into their transactions.  This is to reduce costs and to create a global ledger of counterparty activity that is secure and held in the net for all to see.  That’s how the blockchain works for bitcoin.  However, the Bitcoin community always say you cannot have a blockchain without the bitcoin currency, so here goes.  Here is the exchange between myself and the bitcoin twitterati over the past day or so that clarifies a lot.

First, Jon Matonis retweeted my write-up of our cryptocurrency evening at the Financial Services Club.

In that write-up, I noted that the Bitcoin folks state “that you cannot separate the bitcoin currency from the bitcoin protocol, but that is exactly what is happening (see Richard Brown's excellent blog on this subject for more).  The blockchain is the key technology that is important for banks.”

Dan McArdle, a New York Bitcoin aficionado, picked up on this and said: “for what it’s worth, @jonmatonis is right re bitcoin the currency being inseparable. Blockchains must record in a native unit; ie, bitcoin.”

I replied that the “blockchain could be used to record other currencies than bitcoin though?” thinking that banks could use this to record $:€ or any other currency trades.  That is what banks are looking to do and the fact that Dan says ‘a native unit’ doesn’t mean it has to be the bitcoin unit.

Dan replied:  “In the sense that third parties can say or guarantee that bitcoins represent something else, yes, but the blockchain is still going to record transactions in bitcoin units. Blockchains require the native unit.”

I still think the Bitcoin guys are confusing here.

For example, Dan says that the “key point is that it's broken to say the blockchain is great but the currency is uninteresting.  The former requires latter”, and this got several thumbs up from the Bitcoin crowd.

My view is that the blockchain is a technical protocol that could be applied to another base currency unit – the dollar for example.  This is why I countered that, “as an open ledger, the blockchain can record any transaction … it does not force buying bitcoins to use the blockchain?”

Dan says: “It does! It's an open ledger only of bitcoin-denominated transactions; eg, Address-A sent N bitcoins to Address B is the record.”

Welly from Ripple joined in: “no, Blockchain can process transactions only in BTC, and no other asset – no exception.”

Me: “surely not if the blockchain protocol is used in a completely different context, e.g. to record transaction between banks.”

Dan: “If you remove the native unit, you have a centralized system. In which case, normal databases are faster and better.  The excitement is that we can enable efficient decentralized exchange of any asset via blockchain representation.  But it has to use a native crytpo unit underneath. Else we lose decentralization  and thus we don't need a blockchain.”

This is the most important answer so far, as it makes it clear why thinking about using the blockchain in a non-bitcoin context makes its core raison d’etre null, according to the bitcoin community, e.g. you only need bitcoin for decentralisation of exchange of value in an open sourced network.  As soon as you try to control that exchange, you might as well have a centralised system and then you don’t need the protocol, technology or use of a cryptocurrency.

Richard Brown of IBM joined in: “If you want decentralisation/censorship resistance/no central control, you need a native currency,”

Me: “that's why the banks and governments are trying to adopt the blockchain … to create control.”

Dan: “I think they're legitimate in trying to use blockchain ledgers, or Bitcoin itself, where it creates efficiencies. But there's not enough understanding of appropriate fit yet and the technology is rapidly advancing too, obviously.”

Richard: “I agree. I find using the term ‘ledger’ slows understanding since that isn’t how it works!”

Others joined in too, but we didn’t hashtag the conversation so you’ll have to make do with my summary here I’m afraid.

And if you want to learn more, read a beginner’s guide to cryptocurrencies courtesy of @MrSilverCider @StartJOIN; and a detailed paper on where Bitcoin is today courtesy of @NickSzabo4

Meanwhile, I still don’t agree that you must trade in bitcoin to use the blockchain as the protocol could be linked to any cryptocurrency structure, including one the banks invent for their own use potentially.  Or maybe I’m just pushing the question to see where it goes.

Thanks to @BitcoinRat @jonmatonis @gendal @JustusRanvier @robustus @rat @tek_fin @AdmiralLeviathn @bengraham @cryptolachat @StellarOrg @Ripple @paypebble @wsculley @doctorgoss @NickSzabo4 @mark_a_howard @mmeijeri

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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