Today's Thesis
Bitcoin solved the wrong problem
It often happens that when you set out to solve a specific problem, you accidentally end up solving an adjacent problem instead. So it is that chemists trying to invent a new refrigerant accidentally discovered polytetrafluoroethylene (PTFE), which we commonly know as Teflon, the trademarked non-stick coating on frying pans.
I'm going to argue that Bitcoin has also accidentally ended up solving a different problem to the one originally stated. It's quite a good solution to the adjacent problem, but the mass adoption of blockchain technologies has left us with a blind spot. What was perhaps a small issue sixteen years ago has grown to be a economic and political wrecking ball that we barely notice, despite the damage it does to each and every one of us. Bitcoin could have been the solution - but instead it has become a distraction and a convenient cover for the real villains of the piece.
So let's step back. In 2008 the Bitcoin white paper appeared, proposing a "system for electronic transactions without relying on trust". The core concept was that by eliminating the dependency on a third party (a bank) to establish trust, payments could be sent directly from one party to another without relying on a financial institution. An effective digital cash system would provide freedom for people to manage their money without intervention from governments and costly fees and oversight by banks. That was the goal.
However, two things came to drive Bitcoin in a subtly different direction. Firstly, the key concept that had to be supported by any digital cash system was that it was a reliable store of value. Secondly, in order to encourage a network of Bitcoin-supporting peers to maintain the system, some sort of reward had to be offered. The elegant solution to this second problem was that those on the Bitcoin network would be rewarded for providing infrastructure to generate ("mine") coins and process transactions. Add in the concept of scarcity (there can only ever be twenty one million bitcoins mined by the network), and there is a feedback loop that has proven to be phenominally successful.
Now, there are many arguments over the long term viability of Bitcoin, the issues of volatility and speculation, and the challenges of fraud and deception. However, what cannot be argued is that Bitcoin works. The network has lasted sixteen years, grown to a market cap of an astonishing $1,688,375,618,120 (at time of writing), mined nearly twenty million of the potential twenty one million coins, and spawned many, many imitators and variations. Some of these variations attempt to address perceived flaws in the original design. Some aim to support interesting additional use cases. Some are simply trying to replicate the success and huge reward of the Bitcoin network.
But few solve the original core problem - that of digital cash that can be passed directly from peer to peer without relying on an intrusive and expensive third party. Instead, Bitcoin is seen as first and foremost a store of value. Indeed, the US Government are currently discussing making crypto currencies into a form of Financial Reserve. Bitcoin has become gold.
When did you last pay for something with gold?
Whilst Bitcoin was taking off, two other far more traditional players were adjusting to the new online world. Only a couple of years earlier in 2006 Mastercard formally turned a co-operative of banks into a company listed on the NYSE with a market cap of a little over $3.5 billion and an only slightly smaller annual revenue. Their big competitor Visa also went public in the same year. Those two companies had moved from traditional banking services in the 1950s to card payments and then ecommerce as it exploded in the wake of the Dot Com crash. They were joined by a third company that was not even ten years old - PayPal.
These three companies do not store value. They move debt - quickly and with minimal fuss. It's highly likely that you've paid for something with the assistance (and fees) of one or other of them within the last twenty four hours. When we talk about the rapid adoption of the cashless society, we are talking about Visa, Mastercard and PayPal. Not Bitcoin.
Why do they not store value? Last year, the average American household debt was slightly over one hundred thousand dollars. In comparison, the average American family has sixty-two thousand dollars in savings. Most will save between three and eight percent of their salary each month, but the harsh reality is that for many people in the one of the most affluent countries in the world, the majority of their monthly income arrives in a paycheque that is immediately spent on bills, food and entertainment. Value is not stored, it's moved in, and out at speed.
Bitcoin set out to solve the problem of digital cash for peer-to-peer payments. It accidentally solved the problem of creating an independent currency to store value. In doing so, it left the door wide open for payments to be claimed by the very banking system it wanted to disrupt. Mastercard, Visa and PayPal focussed on three key issues - convenience of getting money into their system, frictionless payment to merchants and processing high volumes of transactions incredibly fast. They've been hugely successful. Whilst Bitcoin has a market cap of one and a half trillion dollars, Visa alone processed thirteen trillion dollars worth of payments last year.
Between them, Mastercard, Visa and PayPal have monopolised online payments in much of the West. In our rush for convenience we have enthusiastically abandoned cash, and in turn they have made transaction fees a constant and near invisible part of our lives. If you buy potatoes at your local farmers market in the UK it's quite likely that you pay through a mobile terminal with a card - and an American company will claim a few percent of the cost. Wherever you are in the world, typically around 2% and as much as 6% of each transaction is in payment processing fees. If you're shopping online, additional costs to the retailer for store integration and online services can raise that to 10% or more of the final price you pay.
In the UK this represents billions of dollars a year - an invisible, remote tax on every transaction online and many on the high-street. It also embeds mass surveillance into our lives. In the name of security, we allow our payment habits, individual transactions, location and income to be minutely tracked and analysed. Ironically, it allows our governments to retain tight control over crypto-currencies as payments into a crypto network are restricted by legally compliant payment processors.
Indeed, we have put ourselves in the position where payments both online and offline are now almost completely captured by a handful of corporations in America who control not only how, when and where we spend our money but also tax both us and the people we buy from for the priviledge. This is especially damaging to individuals and small businesses. Whilst Tesco can negotiate card fees down to a minimum (though still paying an estimated half billion dollars a year), small retailers cannot. This makes it especially difficult for anyone to challenge either large high street shops or online marketplaces like Amazon as their costs are disproportionately high.
In simple terms, our cashless society almost entirely benefits the large corporations and effectively hands them a monopoly. The payment providers form part of an unavoidable toll bridge that can make even the most bare bones business uncompetitive. Amazon can sell the product that you yourself make, cheaper than you can. Potatoes from the local farmers market are a nice treat, not a way to save money with a local trader.
What Bitcoin missed was that for digital cash to become a reality, we needed not only the network, but the systems at the edge and the ability to process high volumes fast. The assumption that putting money into and taking it out of the system would be solved by simply providing a better system that others would service proved to be misguided. Whilst we have seen a growth in crypto exchanges, they are clunky, untrustworthy and often impose fees as high or higher than legacy banking services. Worse still, the architecture of the blockchain does not favour fast processing at volume. The tap and go convenience of modern card payments remains out of reach of the Bitcoin network.
At a psychological level, it seems the architect(s) of Bitcoin did not anticipate how dramatically the world would shift to digital payments. With a limit of twenty one million Bitcoin, the estimated two billion people who use mobile payment apps alone are left with tiny fractions of a coin to represent their exchanges. Certainly Bitcoin scales, but at some level it seems it was never expected to scale as much as our modern online world. It has been left behind.
To the technocrats this may appear to be a challenge - how can we augment Bitcoin, or fork another crypto variant that is bigger, better, faster? I'd argue that this is the wrong approach (though no doubt some exciting white papers could be written). Bitcoin is gold to PayPal's bank notes. We can slice it various ways, or dilute it for convenience, but it will never have the immediacy and accessibility of systems that have been built at global scale specifically for the job.
In 2008, Bitcoin was designed to provide independence from faceless institutions that monitored and taxed our lives. In 2025, the UK finds itself utterly dependent on American corporations for vital financial infrastructure and the world finds itself taxed by an effective technological monopoly. Suddenly, our Government has the same reason to challenge the status quo that led to Satoshi Nakamoto's world-changing Bitcoin white paper.
Whilst technologists may be tempted to reach for existing digital currency ideas and specifically for crypto-currencies, we should remind ourselves that Bitcoin was not the solution to this problem, and never will be. We do not need stores of value, we need zero-cost means to transfer our money independent of corporate control. We've yet come up with a technical solution to that need - indeed it is as much a political and social problem - but we would benefit massively from finding it rather than blindly following a path that has proven to be a dead end.
It's a deeply unsexy concept, alien to the Silicon Valley mindset of corporate capture and growth - but in many ways we simply need cold, hard cash. Or will the next Nakamoto arrive with a white paper as transformative as the one that launched Bitcoin sixteen years ago?
- Andy Toone
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