Days Of Reckoning Fast Approaching For Banks

First, the distribution monopoly of the Postal Services was hit hard by the Net as people discovered they didn’t need to buy stamps. Then, the copyright industry’s distribution monopoly was flatly and unceremoniously run over. As a third and fairly recent victim, we find the old centralized journalism with its tightly controlled news distribution. As fourth and coming victim, there’s an information distribution few people have thought of in terms of information: the money in our society.

We’re certainly using cash freely and casually as we go about our day, but most of our money-moving happens in other ways than by bill and coin. On a moment’s reflection, it is a miracle that there’s actually an industry able to charge 50 to 60 euros a year just to maintain a number — our account balance — in a perfectly ordinary database for us, and the ability to send some dozen messages a month with amounts attached. How is it remotely possible that we still need to pay for such a ridiculously simple information service?

This is a translation of an op-ed piece in the weekly large paper Ny Teknik (“New Technology”), published yesterday on paper and Tuesday on the net. It is available here in its original form, with plenty of comments in Swedish.

There’s an expression called regulatory capture. It means that an industry manages to write their own activity so deep into the law books, by way of lobbying and similar activities, that nobody is able or allowed to compete with them. In this way, they are assured of their market and profitability by regulation and law. If any industry has succeeded in this, it’s the banking sector. The copyright industry is working hard at it, but are clumsy amateurs in comparison.

Therefore, it is especially heartening to watch a technology that will wipe the floor with the entire banking industry and obsolete it almost overnight.

The technology is called distributed cryptocurrency, and the specific kind I’ve been looking at is called bitcoin. The first time you send a half-euro to India on a Sunday and the receiver sees his funds immediately almost feels like magic. Nobody except me knew I was sending money, nobody but me and the recipient could see that he got them. With the old banking system, it wasn’t worth it to make transfers of less than some tens of euros, and they always took several days. There were bank holidays. Opening hours! Here, there’s a voluntary transaction fee — a fraction of a cent.

Handling money worldwide became as easy as handling mail all of a sudden: receiving, sending, sorting, viewing. What’s new is that there isn’t any central point of control that can make decisions about your money, or even about the currency as such. Nobody can freeze your account, and no central bank can start the mints and bill presses to pay off the governmental debt. The money is physically on your own computer in the form of cryptokeys that the bitcoin network recognizes as a value.

The technology also has good similarity to cash in the aspect that it is almost completely anonymous, which makes us privacy enthusiasts happy. With the important addition that this kind of cash can be sent over a distance.

Banks and credit card companies have skimmed between three and five per cent on every purchase we’ve done in stores just to handle a couple of ones and zeros. On every purchase! All of a sudden, there’s an alternative that enables the merchant sector to just cut off this middleman between us and them.

Guess how many excuses that banks will make up to try to have bitcoin banned?

Rick Falkvinge

Rick is the founder of the first Pirate Party and a low-altitude motorcycle pilot. He lives on Alexanderplatz in Berlin, Germany, roasts his own coffee, and as of right now (2019-2020) is taking a little break.


  1. Mats Henricson

    Agh: “The money is physically on your own computer in the form of cryptokeys that the bitcoin network recognizes as a value”. Sorry, not really true. The “money” is in the blockchain, maintained by the p2p network, and only with the private keys on your computer can you claim it.

    1. Rick Falkvinge

      Hmm, but with this line of reasoning, the coins in your pockets aren’t money, either. They’re just tokens issued by the Central Bank which you can exchange for real money?

  2. slob100

    security!? it is their explanation, and the first question anybody will make.

  3. Mats Henricson

    What I mean is that if you look inside your wallet.dat file, you will not find any number showing your Bitcoin balance. And even if there WERE such a number there, it would just be a cached value, for convenience.

    What happens when you turn on your Bitcoin client is that it downloads the latest blocks in the block chain, and inspects if there are any transactions there which are to the keys in your wallet. From these transactions the wallet can finally present a value: You have 16.2341 Bitcoins.

    1. Rick Falkvinge

      Your explanation is technically correct, but how would you explain in an easily graspable soundbite where the money was? “Shared by everybody” doesn’t cut it, nor does “seen by everybody” as one other major point is that nobody knows how much money you have.

      1. Mats Henricson

        I would say that the money is in the p2p network, but only your private encryption keys lets you use them.

        In a way it is the same as your bank account. The money is in your bank account, in a database on a bank computer, but normally only you can use them, by typing in the correct password and PIN.

        The difference to banks is that a bank can freeze your bank account if someone believes you are a terrorist, or haven’t paid your taxes. And you can send money to WikiLeaks or your aunt in Iran without anyone really being able to trace or stop you. And the bank charges you silly amounts of money for their services. And delays many transactions for days to earn interest, just because they can.

        1. Zacqary Adam Green

          Again, that’s technically “where” it is, but the practical implication of it is much closer to actually having the money in a personal wallet. Psychology matters.

          When you’re playing Halo, then technically you’re just looking at a grid of glowing dots representing several complex polygon objects with an overall tint of bright red, but it’s much more useful to believe that you’re being shot at and need to get out of the way.

          1. Mats Henricson

            Psychology matters, sure, but if you describe things poorly, then you just confuse people. As some other commenter said, you can copy your private keys and spend them from two computers. Then telling people that the money is stored physically on their computer is just plain wrong.

            Also, if the money really WAS stored on your computer, then why can’t people spend them immediately after turning on their Bitcoin client after a month of inactivity? Because the client must download the latest blocks before it can tell the true Bitcoin balance of its user. This is very much the same as the money really IS on the network.

          2. Mumfi.

            Actually, having the keys stored locally and the balance in the network sound much more appealing than having the money stored locally. I imagine you will be storing several sets of keys too, for that matter.

            I wonder what would happen if a key is destroyed? Will that money be orphan now? I need to read up on the setup of this Bitcoin thing…

          3. ANNM

            Mumfi: It’s a bit more complicated than described in earlier comments. Every Bitcoin transaction has a condition that must be fulfilled by someone who wants to claim the money. In virtually all cases it’s a public key and you can only claim the money for another transaction if you have the corresponding public key, and in that case, if you lose every copy of the private key, no one can claim that money. That particular thread of the transaction weave will end there.

            On the other hand, the transaction condition can just as easily be a simple password hash where you need to have the corresponding password, or an IP address that you need to be on to claim the money, or something else. The transaction conditions are actually written in a very simple scripting language and checked by all the nodes that are verifying the blockchain in order to mine new bitcoins and get a chance of claiming the optional transaction fees.

          4. ANNM

            Grr. The corresponding _private_ key, of course.

  4. Mats Henricson

    Of course, security isn’t as high as for normal money, but it also depends on in which way you look at Bitcoins. From a merchants point of view Bitcoin can be seen as MORE secure than credit card transactions, since Bitcoins can not be reclaimed. Credit card transactions can be disputed up to 90 days after the transactions (if I remember it correctly). That means that if a merchant receives 10 Bitcoins, then he knows that these Bitcoins are his, permanently, until he sends them somewhere else. For a online BUYER, this may seem risky, compared to credit cards, but this risk can be solved through escrow services. They are popping up left and right.

    If you do want to program with your own money, which Bitcoin lets you do, then sure, you may fall and hurt your knee. If that sounds risky, then stick to money 1.0 until security is better.

  5. julz

    In general I think it makes sense to think of the location of the money as being where the private key is – because if the key is destroyed.. the money is effectively destroyed. It’s an interesting question though as to where the money is if you have a backup of your private key, or two people have a copy and neither has yet spent it on the blockchain. Sounds a bit quantum mechanics-ish.. but I guess if there is more than one copy – ‘where’ it was doesn’t make sense until the network observes it being moved.

    1. Mats Henricson

      Think of a bank. The money is saved as bits in databases and backups. The data is most likely not saved in clear text, but hidden behind passwords and encryption keys.

      Now, what happens if the password and encryption keys used inside the banks to access peoples money are lost? The money would be lost, right? There would be no way to access the money any more. Is this because the money is saved in the passwords and encryption keys? No, of course not. The money is saved in the database. It just can’t be accessed any more.

      Now, why am I rambling like this? It is because with Bitcoins we are our own banks. If I lose my encryption keys, then I can’t access my money any more. The Bitcoins are still out there, but nobody can access them any more. Which is why I still claim the money really IS in the network, not on your network.

      1. Mats Henricson

        Agh, the last sentence should be:

        Which is why I still claim the money really IS in the network, not on your computer.

    2. Mårten

      I don’t know if it helps, but you could think of the wallet as a credit card.

      Your money isn’t stored on your credit card, but rather in a database at the bank. The credit card is just an identity token (the credit card number) associated with your money in the bank database. In the same way, the blockchain (the bitcoin network) keeps track of your balance, it’s not stored in your wallet, only your private key is (the identity token).

      Anyone with the token can access the money. If you copy the token, both copies can be used to access the same money. If the tokens are lost the money is still in the database/blockchain but it can’t be accessed any more.

  6. Kalle

    According to current regulations bitcoin will be illegal to handle in larger amounts for any organization or person due to money laundering regulation. Any bank accepting larger amounts will have to report it to the authorities. This is already an issue for in game-money and trading for some game communities.

    What will happen is that companies that offer payment in bitcoin will be raided by police and then indicted. There is no reason to beleive that the legislators will release the grip on the economy they have. Especially now when they are on the brink on making the black economy impossible.

    It will be as with fire arms in UK: it is illegal to own guns so only criminals (and police) have them. Most people are not criminal. In this case, legal business can not use bitcoin as it will be impossible to convert into standard currency (banks will potentially not be able to accept bitcoin) and thus impossible to use to pay tax or to pay other legal business. If there is no exchange rate it will be hard or impossible to book keep bitcoin assets etc.. This will leave only illegal and marginal business as the only ones using bitcoin.

    So, you are correct that the banks are entrenched in the regulations. The most basic parts of any countrys’ legislation is the regulation of how money are minted and tax is collected. It is not possible to change that without a revolution and for western europe the era of bloody revolutions is thankfully passed.

    1. Mats Henricson

      Existing banks may be too chicken to accept Bitcoins, but new banks may do it instead. The old banks may try to stop that from happening, which is what Falkvinge is talking about. If banks refuse to innovate, then they will be ignored.

      1. Kalle

        The existing banks may not do so. To start a new bank you need money and a permit. You will need about a quarter of a billion Euros or more.

        If you try start a bank without permit you will be thrown into jail a few years later. If you break the tax regulations you will be jailed faster. Banks innovate all the time, but they usually are quite good at complying to law and regulations.

        1. Scary Devil Monastery

          That may be true as long as you call it a “bank”.

          In the US fairly major part of fiscal turnover are handled by “shadow banking” – Which could be wal-mart running a credit card line, a used car salesman making most of his profits brokering bonds and loans…Or what appears to be a group of finance lawyers running a highly profitable loan/mortgage business.

          National laws may vary on this issue but the end point is that “ordinary” licensed banks have had a lot of turnover simply slip from their fingers in favor of shadow banks, even in countries where banking laws are for all effects, draconian.

          That being the case you don’t really need either money or a permit today in order to start something which for all intents and purposes acts like a bank in 90-95% of it’s transactions while having few or none of the relevant licenses or certificates due an official bank – but which still operates legally.

          Money laundering laws are, in effect, useless. The only thing they accomplish is force greater innovation in fiscal schemes. Some of which are so lucrative or profit-saving in themselves that it is hard to motivate why private industries and citizens should not make use of the same.

          Take bitcoin – the real value lies in the fact that it can legally avoid numerous charges which have become standard for most card/transfer services, thus generating a powerful motivating force. Even if what you stand to save is 0,01% of the turnover this number quickly becomes highly motivational as the amount of money you handle with it increases.

    2. Anony Mouse

      In which jurisdiction(s) is this the case, and which legislation are you referring to?

      So far, very little can be assumed about Bitcoin. In the U.S. there are new “prepaid access” regulations that would impact bitcoin if bitcoins are deemed to be a method that gives “access to value” that is transferred electronically. But those regulations require the “provider” to keep records. Bitcoin has no provider.

      An argument is made that if bitcoin becomes regulated then so should baseball cards::

  7. dave

    Although bitcoin can be used in its ‘raw’ form using the bitcoin client, there is a service layer being developed to help its usability for general use. These include services for securely storing bitcoins (security is currently a big problem for non-experts), paying instantly (normally, you might have to wait an hour to be sure a transaction has completed), escrow, and various other merchant services. These services will likely incur charges, although probably not as much as the banks. The great thing about bitcoin is that you have the choice whether to use bitcoin directly or use the additional services. This is a bit like gold, where you can choose to store the gold yourself and use it directly for exchange, or use the services of a bank to store it for you and give you a certificate to use for exchange.

  8. Mumfi.

    What makes you think there will not be a fractional reserve thing built on top of Bitcoin by emerging escrow services and other institutions? Having a better base for the monetary supply does not in any way prevent the fractional reserve system. I guess that very soon the trade will shift from Bitcoin to Bitcoin Credit. For convenience.

    Bitcoin Credit will be susceptible to inflation and so on? Or won’t it? Will the inability to confuse the credit for the base prevent this? The supply of Bitcoin Credit will be infinite the supply of Bitcoin will not be. Is the problem today that we confuse the credit money with real money?

    In either case we need to address the credit creation. I have always been a proponent of a decentralized credit creation along the lines of the Wave system. A stable inflation resistant base would be perfect for this.

    1. ANNM

      Yes, if cryptocurrency becomes widespread this is almost certainly what will happen. It’s not technologically possible to prevent credit creation by any sufficienty powerful entity (e.g. a state).

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  11. Galuel

    Bitcoin is not the only distributed cryptocurrency money model.

    In fact Bitcoin is not a space-time symetrical money system. It’s a temporel pyramid scheme where next generation users won’t be able to participate in another way than being slaves of the first one.

    OpenUDC is a space-time symetrical cryptocurrency money system human based on OpenPGP web of trust. . Better for those who think every man is born free and equal whatever date he borns, and the old ones have no right to decide he has a pseudo “debt” to pay to anyone, but the right to own the entire planet as any generation later.

  12. Anonymous

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