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Bitcoin vs the State: 10 Years Later

Alexander Borodich, Forbes Contributor

The article originally published on forbes.ru http://www.forbes.ru/tehnologii/370767-bitkoin-vs-gosudarstvo-10-let-spustya

Photo Credits Getty Images

Bitcoin is ten years old today. Here is how it appeared, what changes it had to go through compared to Satoshi’s original vision, and what it can expect in the future

Year 2018 marks the tenth anniversary since Satoshi Nakamoto published his original letter describing a revolutionary model for sending payments via Bitcoin network. In late November this year, the cryptocurrency founder’s account in P2P Foundation came alive with a single mysterious word “Nour”, after being silent since 2011, which immediately caused a storm of interpretations. Most of the discussion was centered around the key question: “How did the new technology tool change the world we used to know, if at all?”

In 2008, someone going by the name of Satoshi Nakamoto presented a concept of a new payment system to a small group of software developers. The system could mitigate the role of the government — an institution that could be very selective in its actions, bailing out one bank and helping another go bankrupt. Previously a person had to go through numerous intermediaries and pay substantial fees; now they could transfer millions of dollars in minimum time and at incomparably lower cost, while maintaining a certain degree of confidentiality. For example, Sberbank charged 2%, or up to 2000 rubles, on money transfers to other lending institutions without opening an account, while Bank of America would charge $30 for an outgoing domestic money transfer. For comparison, a transfer of $175 million in Ripple would only cost around 10 cents.

With the global financial crisis unfolding and the faith in classical financial institutions tumbling down, Bitcoin immediately gained popularity — first among crypto anarchists who stood up for freedom and online anonymity, followed by the mass market. But did the new technology really appear out of nowhere?

The BTC technology: the birth of a new paradigm

Let’s step back and take a look at the foundation on which the giant cryptocurrency industry appeared, to see the underlying reasons behind the emergence of blockchain.

At the turn of the century, banks started lowering the requirements to borrowers, giving out loans secured by real estate that had already been mortgaged. Nothing seemed to spell trouble: the construction boom in Europe and the USA promised a healthy growth of mortgage securities.

First signals of upcoming trouble came from European banks — HSBC in Britain and BNP Paribas in France, which reported massive default by the borrowers on their mortgage obligations. Given the situation, Lehman Brothers, which had substantial mortgage assets, had to abandon the idea of another share issue and seek government support, due to reduction of Standard & Poor’s ratings. Despite seeming to exemplify the American dream (158 years of successful operation, $59 billion in revenue at the end of fiscal year and $4.2 billion in net profit), one of the largest investment banks in the world filed for bankruptcy on September 15, 2008. Dozens of lawsuits would follow, targeting leading rating agencies and audit companies, which, according to the US government, misled the investors with their decisions and analytical reports concealing the true picture. Lehman Brothers bankruptcy launched irreversible processes leading towards the global financial crisis and created fertile grounds for the advent of Bitcoin.

Millions of users worldwide were enthusiastic about Satoshi Nakamoto’s concept of Bitcoin, which let them experience financial anarchy and independence from the government institutions. Some Reddit users subscribed to the “We need crypto” slogan after a charity run in which $15 million was raised and $482,712 (or 2.9% of the amount raised) had to be paid for processing the transactions.

Realizing one’s rights leads to realizing one’s duties

Development of the crypto market generally follows the key phases of the banking boom of the early nineties. As many of you might remember, anyone with or without a passport could open an account back then, and nearly anyone could register a legal entity. Banks had the power to identify suspicious transactions and report them to the regulator; however, this didn’t happen very often in reality.

However, as the budget deficit tightened and economic growth in the world’s leading economies stalled, increases in retirement age and higher social liabilities forced the financial sector to revise its approaches to “know-your-customer” (KYC) and anti-money-laundering (AML) procedures, under the general excuse of fighting organized crime and terrorist groups.

Today, a bank’s compliance officer can request any incorporation documents, abstracts, grounds for transactions, tax declarations, business and personal connections, etc., which means it takes months to open an account and one click of a button to close it. This applies to ordinary customers and millionaires alike on either side of the Atlantic if they cannot prove legal origin of their money.

The Empire strikes back

For some time, the regulators turned a blind eye on the bold pace of Bitcoin and its derivatives: hundreds of crypto foundations appearing, billions of dollars flowing from one wallet to another, insane amounts of money raised at ICOs, while crypto news were all over the leading business publications of the world. However, it was the period between fall 2017 and winter 2018 that triggered a major government campaign to regulate the crypto market.

First of all, the requirements to ICO organizers, crypto exchanges and end users were tightened in almost all European countries, Asia and the USA, both in terms of registration documents and KYC procedures. As a result, legal support started taking a substantial part of crypto companies’ annual budgets. Second, regulators are making their own attempts to de-anonymize Bitcoin: Department of Homeland Security, FBI, Securities and Exchange Commission regularly engage private companies that monitor Bitcoin and other crypto currency transactions. Blockchain analytical services are used to establish patterns within the massive arrays of wallet owners and payment beneficiaries. For example, as a result of one such investigation, the US Federal Court upheld the Internal Revenue Service claim against Coinbase crypto exchange, forcing it to reveal personal data of some 14,000 users.

Ten years after the emergence of Bitcoin, we cannot say that the cryptocurrency won the symbolic David vs. Goliath standoff. I think Bitcoin will remain the golden standard of the digital world for quite some time, until eventually it is replaced with new projects that enable central banks to issue their own cryptocurrencies, the way it is happening in Venezuela, implement smart contracts in public administration and private sector, as Sberbank does, for example, with blockchain-based foreign currency repurchase transactions.

While blockchain will definitely not address the humanity’s every problem, it is quite capable of moving the traditional services in logistics or online payments to absolutely new speeds. Most likely the end users will not even notice the transition period. In five years, the blockchain technology can take a step up from isolated pilot projects to industry-wide use, while the fight between the Financial Empire and Anonymous Resistance forces will continue for a long time to come.



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