September 20, 2020
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Why Bitcoin Is Needed: The Problem of Modern Financial Institutions - Part 3

Bitcoin is both a payment network and a form of money that has unique capabilities, illogical for most of us, given oureveryday money experience. This is money without limits. This is programmable money. This is money that cannot be confiscated or seized by governments. This is money that goes beyond any regulatory framework developed by mankind today. This is money that does not see jurisdictions or borders, and which cannot be limited by the rules of foreign exchange.

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Bitcoin payment network provides the systemtrust for senders and recipients of money, which does not require a bank or regulatory authority. This payment network is not owned or controlled by any authority or legal entity. And there is no legal entity that can be legally eliminated in an attempt to destroy Bitcoin.

Bitcoin, not blockchain, was a real revolution! This is the most significant advancement in the digital industry for society as a whole since the advent of the Internet.

This final article will show thatBitcoin is not affected by the flaws of traditional monetary systems and how it can benefit society. It will also address the question of why Bitcoin is so revolutionary and, apparently, "unstoppable." The refutation of typical arguments against Bitcoin, such as power consumption, its volatility, or “slow transaction speed,” will not be addressed in this work. However, these important topics will be the subject of future articles.

What problems does bitcoin solve?

Bitcoin as a destroyer of financial intermediation

As indicated in the first and second parts of this series -commerce and transactions around the world began to rely on many different interdependent financial institutions: central banks, ordinary banks, correspondent banks, credit card companies, payment systems, SWIFT, etc. And each of them requires a fee for the role they play in processing payments.

In addition, in addition to the attendant difficulties and costs, successful commerce requires trust:

  • Successful trading requires that society and banks trust other banks and central banks over them. That is why regulation of large institutions is required to ensure such trust;
  • In fact, the nature of the payment system isthat everyone, from the sender to the recipient and all intermediaries, needs to trust each other. To ensure this trust, various types of control are required, such as KYC (know your customer), AML (anti-money laundering), ID&V (identification and verification), etc. to make payments possible.

Bitcoin (upper case "B" means that wewe mean the Bitcoin payment network) was the world's first successful attempt to create a peer-to-peer monetary system (lowercase “b” means that we call bitcoins as a currency), where:

  • No intermediaries or financial institutions required;
  • No person or authority can be trusted in terms of ensuring successful payments.

Bitcoin payment system provides trust,such that payments can be made by anyone, without the need to know or trust anyone else in this system, and also without the need to have comprehensive authority to provide the necessary trust.

As a result, it reduces transaction costs andallows anyone to become a member of a system that does not require you to provide KYC documentation, pay a monthly fee or reach a certain age, as required by banks.

Bitcoin Issues Limited to 21 Million

Unlike paper money, which can beprinted / not printed by central banks or treasuries, the offer of bitcoins is fixed, unchanged and not influenced by the authorities. This is very different from other cryptocurrencies, where individuals can influence the money supply or even the level of inflation.

Bitcoin, therefore, solved the problem of inflation. Bitcoins are inflation-resistant digital assets that cannot be copied. All digital files that you know: music, images or emails - can be copied. Bitcoins cannot be copied. When you send someone an email, you save a copy. But, with bitcoins, this will not work. When you send bitcoins to someone, you no longer have a copy of them.

Bitcoin is a new payment system

This is not the version of payments with which we are alreadyfriends: PayPal, Zapper, etc. This is not a payment system built on the basis of existing payment infrastructures such as banks, SWIFT or card networks. Bitcoin does not need to function in conjunction with any banking system.

This aspect makes it fundamentally different fromsolutions like Ripple, Libra or digital currencies from central banks. For example, Ripple still needs to interact with existing banking infrastructures that are old, fragmented, non-standardized, expensive, and difficult to innovate. With the help of Bitcoin, payment applications can be created without any restrictions or the need to modify anything into these traditional, outdated systems.

Bitcoin - Transnational

Bitcoins do not have a physical location. Bitcoins exist on the blockchain, which is a global decentralized, jurisdiction-independent distributed database. The blockchain is global, and although the concept of physical location is generally meaningless in the virtual world of bitcoins, you can think of them as “everywhere.”

As a result, Bitcoin does not fall underthe patronage of a particular government or regulatory body. It is immune to currency restrictions that are applied by regulators. Bitcoin gives you a way out of the “controlled market” imposed by the rules of some countries. In the second part of the series, this was discussed in the Financial Repression section. Regulatory restrictions on the amount of money you can invest in offshore, also, can not be applied to Bitcoin.

Bitcoin seems "unstoppable"

How is it possible that bitcoins cannotbe regulated, limited, controlled, seized or otherwise censored by any government? How is it possible that bitcoins do not fit into generally accepted ideas about the borders of countries and are not protected from exchange or currency control?

To answer these questions, we first need to study the Bitcoin blockchain and the nature of bitcoin transactions. After that, we will be able to determine the economic and geopolitical consequences of this new currency.

Bitcoins live outside our geographic world of country borders and jurisdictions

As already mentioned, bitcoins do not havephysical location. Bitcoins exist on the blockchain, which is a global, decentralized, jurisdictional distributed ledger. Your bitcoins are already “everywhere.”

There are actually no bitcoins in your wallet!

Bitcoin wallet software createsthe impression is that satoshi are sent between wallets, but, in reality, bitcoins simply go from transaction to transaction, and these transactions are stored in a global chain of blocks. Each transaction spends Satoshi previously received in one or more earlier transactions, so the input of one transaction is the output of the previous transaction. The transaction output in bitcoins effectively determines the amount of Satoshi that can be spent, and who can spend it. Only someone with the correct public / private key pair will be able to unlock bitcoins and spend them.

Moreover, even though your walletgives the impression that you have a certain amount of bitcoins on your mobile device or hardware wallet - you actually do not have these bitcoins. You have cryptographic keys that allow you to spend bitcoins that are blocked in the output of a transaction that is stored on the blockchain.

Therefore, when you and your hardware wallet travel around countries, you really do not take bitcoins with you outside the country.

There is no such thing as “sending bitcoins to someone”

To be technically true, there are no bitcoins in the world.things like transferring or physically moving money. When you and your hardware wallet travel to another country, the unspent transaction results are already there. They are already "everywhere."

Therefore, bitcoins are always global, and when youmake operations with bitcoins or “send” them to other recipients, all you do is announce the change of ownership, which is confirmed by the entire network of online bitcoin clients. Bitcoins themselves in the physical sense, in fact, do not move.

Thus, all laws and the legal framework regarding the transfer of money (for example, for money transfer operators) cannot regulate bitcoins, because we do not transfer money with bitcoins!

Bitcoin transaction transfer can take place outside the Bitcoin network

Bitcoins are a form of money that is completelyindependent of the underlying transport medium. A Bitcoin transaction is a digitally signed data structure that can be transmitted at various transport levels or using communication tools such as email, SMS or Facebook, and not just in the Bitcoin payment network itself. All that needs to be done for the transaction is to somehow contact the network and miners in order to ultimately include it in the block.

In addition, the communication channel can be completely insecure, because in the transaction of bitcoin there is nothing sensitive to hacking.

Bitcoin Transaction Securityprovided by the legal possession of the public and private keys, as well as the Proof-of-Work consensus mechanism. This is their main difference from, for example, credit card transactions through a device at a point of sale, where your actual credit card information (card number, expiration date, CVV code, etc.) is transmitted through this device and all intermediaries, while will not reach the issuing bank for authorization. This information is confidential, and if it is intercepted and decrypted in any way, the account of the credit card holder may be hacked. Strict implementations of PCI DSS (data security standards in the payment card industry) are designed to minimize this risk, but the fact is that unlike transactions with bitcoins, what you transfer to the issuing bank is actually confidential data.

In addition, various participants in anythe payment chain is forced to store confidential information from a credit card. And we saw many examples of how this information was stolen. And not always because the participants in the payment chain were delinquents, but because a sufficiently motivated hacker or criminal would ultimately always find a way to get this information. Credit card details, in fact, are access codes to your accounts.

Bitcoin operations are fundamentally different. Transmitted transactions are not “access codes”, but simply digitally signed messages. A transaction is an authorization of someone who can spend the output of an unspent transaction on the blockchain. The transaction does not contain sensitive data. If you intercept this transaction, all you will know is what address the money comes from, what address can spend it and how much you can spend. Signatures do not reveal anything. Addresses do not show anything. Even if you intercepted a transaction, you cannot change the transaction because every part of it is included in the signature. Although, if necessary, purely technically, Bitcoin allows the parties to the smart contract to change certain parts of the transaction using the SIGHASH flags and ANYONECANPAY modifiers.

Therefore, this transaction can be transmitted throughany unprotected communication channel. Nothing in the message can be compromised. The transaction is separate from the transmission medium, so it does not require any basic security. All we need is for the message to reach one node on the Bitcoin network. From there it will be distributed to other nodes and checked by the network.

Bitcoin transactions can be converted to any type of message

Bitcoin transactions are data structures. Essentially, transactions can be encoded in various formats, such as images, which can be sent to the recipient by email or published on the web page for the recipient to access. The recipient simply needs to decode the new file format in order to receive the original transaction and embed it in the Bitcoin network. Bitcoin transactions can even be hidden inside images that can be sent to recipients using any convenient means of communication.

So why can't bitcoin transactions be banned or blocked by, say, tyrannical governments?

Because transactions in bitcoins representbeing non-compromising data structures that can be transmitted in various formats using the various communication mechanisms at our disposal, it is practically impossible to prohibit transactions in bitcoins or impose cross-border restrictions on them.

Therefore, bitcoin is a type of money, "transfer"which is no different from data transfer. Today, we have too many interconnected communication mechanisms and social networks for any body to even try to block the transfer of bitcoin transactions.

It is also important for underdeveloped countries where there is no Internet connection, but where you can use radio or SMS / GSM.

Regulation can certainly be applied.where Bitcoin fits in with fiat, for example, when exchanging cryptocurrencies. Cryptocurrency exchanges and exchangers can still be regulated. By law, they can be closed. But what is regulated or closed is just the external interface or the intersection of bitcoins and paper money, but not Bitcoin itself.

Completion

Bitcoin is an alternative form of money thatindependent of the vagaries of senior financial decision makers or political programs. This is a formidable system that cannot be easily undermined by those who actively invest in their own status quo. The Bitcoin network has been running smoothly for the last ten years. This is the most cryptographically secure network this world has ever seen. Developers continue to improve the network and build scalable second-level solutions on top of the blockchain. Consequently, Bitcoin has a real reputation that will support it in the long run.

Posted by: Irlon Terblanche

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