Bitcoin’s Future is Not Outside the Banking System

By: Justice Clark Litle

Sep 11, 2020 | Educational

Imagine losing $16 million to hackers because you installed the wrong program on your computer.

This actually happened to someone, according to a recent post on GitHub, a popular software development platform and message board.

The poster reportedly had 1,400 Bitcoin — worth more than $16 million at the time — stolen from their Electrum crypto wallet after installing a “security update” from a malicious source.

The problem was that, for older versions of Electrum wallet software, hackers had figured out how to add compromised servers to the network.

This meant that, if the user of an old Electrum wallet logged in for the first time in years, they might wind up exposing their crypto assets to a hacker without knowing it.

Whatever the mechanics, the very idea of losing millions of dollars to a software hack sounds insane. It is a reminder that, in the world of personal crypto wallets, there isn’t any theft insurance or recourse for damages. If someone steals your crypto assets, they are gone.  

The reality of this is not much different than, say, having bars of gold or bricks of cash that could be stolen from one’s property.

Then, too, well-known professional poker players have long been wary of being robbed, thanks to their habit of having tens of thousands, or even hundreds of thousands, in cash and casino chips on hand.

But still, letting $16 million get stolen? Because of a software exploit? That sounds insane.

In our view, the anecdote illustrates why Bitcoin’s future is not outside the banking system. Rather, Bitcoin will make use of existing finance layers as it sees fit, while changing the system from the inside out. 

There is a simple truth that hardcore crypto enthusiasts miss: A great many financial innovations are highly useful, or even vital, in terms of making the system work better.

Take insurance, for example. The idea of pooling risk — so that a single individual does not have to make an all-or-nothing bet — has been around since the days of merchant sailing ships.

The original insurance houses arose from the concept that, rather than betting one’s entire life savings on a single merchant ship — which could sink in a storm, or get overtaken by pirates — it made far more sense to spread the risk over multiple ships and voyages.

An insurance firm can provide a valuable service, while still turning a profit, through the logical pooling of risks. While it is inevitable that some of the risks in an insurance pool will go bad, most of them will not, allowing the insurance operation to function as a business by collecting policy claims.

This is why you can take out insurance on your gold bullion, for example, or have the gold bullion storage facility guarantee against theft or damage as part of the storage cost.

For large amounts of Bitcoin, the custodial solutions of the future will likely work the same way.

While it will still be possible to, say, have $2 million worth of Bitcoin stored on a thumb drive in the back of your sock drawer, or buried in a capsule in your yard, it will make a lot more sense to have the funds held in cold storage by a trusted private entity, in the same manner gold bullion has been held by private banks for hundreds of years.

Some will object that storing Bitcoin with some third-party entity dilutes the point. But it doesn’t — not really — because the main feature of Bitcoin is protection from the debasement whims of governments and central banks.

As Bitcoin rises in popularity, custodial services are likely to become far more popular.

Traditional banks might even get into the game — although entities that refused to engage in fractional reserve banking might have an advantage.

In fact, once people get used to it, having a large sum of Bitcoin stored with a trusted private entity might feel like using a bank that only deals in sound money. 

There is no reason that BTC assets could not be lent out or used for financing, on a reasonable basis, while also being insured against theft and loss.

The option to hold one’s own Bitcoin would still be there, of course — but perhaps it could be used for smaller sums, the way some individuals have a modest amount of cash (but not a crazy amount) in a home safe.

The flexibility of Bitcoin is key here, along with the ability to take advantage of all the good and useful innovations finance has to offer.

Then, too, this still means opting out of a morally compromised fiat currency system, in which one can never be sure how much fiat currency one is holding has fluctuated up or down from one day to the next.

In the future, we will hear a lot more about large pools of savings held in Bitcoin, with a great advantage of Bitcoin being the democratized aspect of how easy it is to hold — unlike gold, which quickly becomes unwieldy to the point of headaches when going beyond the sum of a few coins.

What we likely will not hear about in future, however, are frequently repeated instances of savers losing millions of dollars’ worth of BTC via hacker exploits of old wallet code. That is because Bitcoin will change finance from the inside out, rather than shunning the financial innovation layers that make sense.

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