Crypto-Flavored Banking — Don’t Fall for Fake Adoption
Nine years after the first Bitcoin purchase of a 10,000 BTC pair of pizzas, millions of people around the world are excited about the idea of cryptocurrency. They have many different reasons for their excitement — some want digital cash, some want digital gold, others care more about the underlying technology, and many are speculating in the hopes of striking it rich.
Something that everyone seems to agree on is that we’re hoping to one day see widespread “crypto adoption.” Everything that can be done to get more people using cryptocurrency is seen as a good thing. But what does “crypto adoption” mean? What exactly does it mean to use cryptocurrency anyway?
Not all forms of crypto adoption are equal.
In fact, some popular efforts are actually at cross-purposes with the entire reason cryptocurrencies were invented in the first place. Cryptocurrencies offer us the promise of saving digital gold or spending digital cash while not needing to trust large financial institutions, yet some forms of crypto adoption are trying to force us back into those old systems.
Using cryptocurrency while being completely reliant on large financial institutions offers nothing meaningful over just using existing payment systems — it’s just crypto-flavored banking.
What is the point of cryptocurrency?
To understand why not all crypto adoption is equal, we need to understand why cryptocurrency exists in the first place.
In late 2008, a pseudonymous author called Satoshi Nakamoto emailed a paper to a cryptography mailing list. The paper described a novel system for digital cash which drew heavily from earlier cypherpunk proposals. In early 2009 he implemented the system, and Bitcoin was born.
According to Satoshi, Bitcoin is all about having an electronic payment system which broadly removes the need for trust and specifically removes the need for financial institutions to serve as trusted third parties.
What problem was Bitcoin solving?
In Satoshi’s own words:
Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model…
These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.
The problem is that the old payment system is based on trust. Here is his solution:
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.
He states this more succinctly in the conclusion:
We have proposed a system for electronic transactions without relying on trust.
This is a powerful vision; it’s digital money — cash or savings — that you can hold or spend without needing to place trust in any financial institutions. Those with even a cursory knowledge of the track record of private or central banks know that having money outside their control is incredibly valuable.
There is no central organization which manages Bitcoin — otherwise, you would need to trust them — and this decentralized aspect of Bitcoin gives if several unique characteristics.
- It is permissionless. No one grants you access to the network, no one can kick you off the network, and no one can stop you from saving or spending your coins.
- Ownership of Bitcoin keys means control of the corresponding coins. In other words, whoever owns the keys to a certain address controls the coins. No one is able to recover coins if the keys are lost, and no one can access coins without the keys.
- There are no terms and conditions or accounts to sign up for. Your identity isn’t inherently tied to your transactions — though privacy isn’t assured.
For people who value control over their own money and commerce, Bitcoin (and similar cryptocurrencies) is a powerful tool that removes the need to trust third parties (or at least significantly reduces our dependency on them).
Crypto Adoption + Trusted Financial Institutions = ?
Today, many people use cryptocurrencies for their original intended purpose of having money and commerce without trusting third parties. They do this by owning the keys themselves — thus holding wealth without needing to trust a bank — and/or by sending their coins directly to vendors or friends and not relying on payment processors or other middlemen.
Not everyone uses cryptocurrencies as they were originally intended. Many people use them while maintaining a complete reliance on trusted third parties. They don’t hold their own keys, meaning they don’t actually control their coins. The third parties require permission to use their services, undercutting the permissionless nature of the system. Many of the third parties are tied into financial institutions which implement restrictive practices that Bitcoin was invented to avoid.
Spedn / Flexa / Gemini Example
There are many examples of this, but here’s a recent one to illustrate it. Last week, a new app called “Spedn” was announced at the Consensus conference.
At first glance, this looks exactly like the kind of crypto adoption we want to see. People spending their coins at 30,000 different locations, what’s not to love?
The problem with Spedn is that it doesn’t take advantage of any of the things that make cryptocurrencies unique and powerful, and it still retains the trust in financial institutions that Satoshi was trying to avoid.
In other words, this is counter-productive crypto adoption, if it can be called crypto adoption at all.
Let’s examine why this is the case.
Spedn is not permissionless
You need Flexa’s permission to use their app. They can kick you off anytime. They engage in “Suspicious activity monitoring,” described as the following:
Flexa monitors for suspicious activity on its payment platform, while simultaneously Flexa’s licensed, third party custodian monitors for any suspicious deposition originations.
You can only use the Spedn app with “authorized merchants.” If you want to spend your coins on anything else, too bad — they aren’t actually your coins anymore. You can’t even spend your coins online. It only works in retail stores.
Spedn controls your coins
There’s a popular saying in the Bitcoin community: Not your keys, not your coins. You don’t fully control the coins in the Spedn app (which is controlled by a company called Flexa Network Inc). According to their legal page:
When you deposit your cryptocurrency into the App, your funds are held and insured with a licensed third party custodian.
In order to “spend cryptocurrency” you need to give your coins over to a third party. They then handle those coins themselves, and they settle the transaction with the vendor when you purchase something. If this app is anything like other payment processors, the vast majority of the time the vendor never touches the cryptocurrency. They receive fiat money.
Spedn is not private
In order to use Spedn you must give them personal information:
You may also be required to provide Flexa with certain information about yourself, including some types of personally identifiable information, such as your legal name, phone number, physical address, and email address.
But their privacy policy is… less than reassuring:
This app is a partnership with Gemini, an exchange licensed in New York.
Gemini has been running an ad campaign which focuses on the need to force financial regulations on the cryptocurrency industry with slogans like, “Revolution Needs Rules,” “Crypto needs rules”, “The regulated exchange”, and “Crypto without chaos,” as well as placing a full page ad in the New York Times explaining how their company is best because they are “compliance-centric.”
It’s certain that between Flexa and Gemini that all users of the Spedn app will be forced to fully comply with Know Your Customer and Anti-Money Laundering laws (KYC/AML), which are huge invasions of privacy and completely antithetical to the permissionless nature of cryptocurrency.
The fact that you don’t control your coins, you don’t get to choose how you can spend your coins, you have little privacy, you must abide by strict rules, and that you are completely trusting third-party financial institutions means that the Spedn app isn’t really crypto adoption — or at least not crypto adoption that serves any purpose which can’t be served with existing payment methods.
The Haven Alternative
Are there any convenient alternatives for people who want to control their own coins, choose how to spend them, have privacy, not be forced to open accounts and abide by strict terms and conditions, and not completely trust third-party financial institutions?
Since you’re reading this on the Haven blog, perhaps it’s no surprise that the answer is yes! Haven is a mobile app which allows people to take advantage of cryptocurrency’s unique characteristics. Haven enables you to shop, chat, and send cryptocurrencies privately.
It’s based on OpenBazaar, a decentralized network for peer to peer trade. It’s permissionless; anyone can join the OpenBazaar network without needing to sign up for accounts or do anything except use the software. There’s no fees or censorship.
Haven users control their own coins locally on their device. In fact, all the important data is stored locally. Haven is built to be private. All chat and order messages are end-to-end encrypted.
The company behind Haven — OB1 — doesn’t control who can use the application. There are no “authorized merchants.” Anyone can set up a store. You can buy and sell buy and sell what you want, with who you want, wherever you want — at no cost.
We’ve written a lot about Haven’s privacy before. There is still some trust required in OB1, but since you’re not forced to share your personal information or coins in the first place, there is much less you are trusting OB1 with compared to apps like Spedn.
Want to help drive real cryptocurrency adoption?
Be the first to get your hands on Haven, coming soon for iOS and Android. Join the waitlist now at gethaven.app
Originally published at https://gethaven.app on May 22, 2019.
