Bitcoin and Why It Must Remain Decentralized


The following guest post is courtesy of Paul Puey, CEO and Co-Founder at Bitcoin wallet company Airbitz.

It seems like 2015 should be the year for bitcoin to level up. Everywhere you look there are crises caused by centralized currencies. In Zimbabwe, hyperinflation finally caused the government to abandon their currency and switch to the US Dollar; the Greek government instituted emergency procedures that dictated how banks could operate; and bitcoin was right there to rescue people from the problems caused by centralized monetary policies.

Actually, it wasn’t. In fact, bitcoin was entirely irrelevant despite all of the buzz on blogs about how these crises were exactly why we need it.

Paul PueyBefore we get into why bitcoin did not make a difference in this year’s financial disasters, let’s establish some history about centralized currency. Despite being an advocate for bitcoin, I tip my hat to what centralized currency has done for the world.

Money used to be very much like bitcoin. Whether it was gold or jewels or fine stones, the various items used in bartering were taken at face value. That is where the famous scale symbol comes from. You would actually put your gold on the scale and it would be weighed. If you had an ounce of gold, that was it. You had an ounce of gold and it was worth one ounce of gold.

But of course gold is not convenient to transport on foot over long distances, which was a much more common form of travel many centuries ago. To remedy this issue (and others), paper currency was invented. The paper held no real value, it was simply a note that guaranteed a certain amount of gold existed and could be redeemed with that note.

This is where trust entered into currency. In order to accept those paper notes as valid currency, the recipient had to trust that they were authentic and actually represented real gold.

Over several millennia of human history we have seen this system of trust and paper money do some amazing things. Out of it was born the modern financial system, which for all of its faults, does facilitate the largest global economy the world has ever known.

Paper currency is also responsible for many of its shortcomings. And I’m not even referring to whole currencies collapsing and taking peoples’ life savings with them. I’m talking about the fees you pay your bank just so they can keep your money for you. How absurd is that? It costs money to have money!

Since the day I earned my first pay check I have been trained to think that my money belongs in a bank. Think about the (classic) scene in Mary Poppins where the boy is being pressured into putting his first allowance (two pence) in the bank and he doesn’t want to do so. The boy wants to use his money to feed the birds, but he knows that if he trusts his money with the bank’s financiers, his ability to withdraw his funds and spend it will be restricted.

We pay “custodians” (banks primarily) billions of dollars every year just to hang on to our money for us. These custodians then do many things with our money, to include losing it as we saw in the last decade of financial upheaval.

Now at this point a lot of people tell me, “Yes, but your money is insured. If your bank falls on hard times, the government will support it.” Let’s get into that.

I don’t like the idea of a private institution being able to peer into my personal finances, much less a government. But even before a government steps in to take over a struggling bank, their fingers are already all over your finances. Think about all of the restrictions that banks put on how you can use your funds that are all the result of government regulations. You can only withdraw so much or deposit so much; there are rules about cash transactions and sending money internationally; there are delays built into the system so oftentimes if you want your money now, you can’t have it.

Now pause for a moment: this is your money. Imagine buying a Chevrolet and then the dealership telling you that you can only use it on weekdays and every other Saturday. You’d say, “No this is my property and I should be allowed to use it in a manner that does not endanger other people’s lives.” And rightfully so.

In light of the egregious behavior of banks, why is bitcoin struggling to make a difference? The reason is because, despite most of the community agreeing that centralized control is antithetical to the ethos of bitcoin, we have done a very poor job of being decentralized.

Without naming names, if you have your bitcoin with most of the major bitcoin companies in the world, they likely have some control over your funds and information. They collect information about you, dictate how you can use your funds, and will even prevent you from using your funds if they believe you are doing something that violates their policies. In other words, they are watching you and setting guidelines for you to operate within.

Most bitcoin companies are just like normal banks. They are custodians of your funds.

That also means they can be manipulated by a government if the government decides they need to intervene. In Greece, bitcoin companies that operate the way I just described were just as hamstrung as the brick and mortar banks with the ATM machines out front.

Additionally, keeping your money with a bank-style bitcoin company limits your access to the world of bitcoin. You are only able to use your funds in ways that are authorized by your hosting company and many of them have very limited interfacing abilities with the wide world of bitcoin.

Think about it like the early internet. There was a time when having America Online (AOL) was the only way to access the internet and it successfully converted millions of people from skeptics into users. But then it became possible to simply download some software (Internet Explorer, Firefox, etc) and you could access the whole web without the restrictions that the AOL portal put on you. That is when the internet blew up.

Think about these bitcoin companies that control your funds and how you use them as AOL back in the early days. Think about the truly decentralized bitcoin wallet companies that don’t even retain your email address as the Safaris and the Chromes.

The analogy is not perfect, but the central point is simple: any service that retains control of your bitcoin and how you use it is necessarily a custodian and a centralized point of failure.

One final point needs to be made in regards to trust. Many people tell me that the bitcoin banks need to exist so that they can facilitate the more complex aspects of any currency, like investing, etc. The idea is that institutions with expansive resources can verify good investments from bad, pay out interest on savings accounts, and do other things that seem necessary in today’s financial system.

This is true and false. It is true insofar as there is a place within bitcoin for lending institutions that make large investments in commercial scale projects. It is false insofar as it suggests that investors and investees cannot be verified independent of an organized banking institution. The internet has already blazed the trail for building trust networks. From simple platforms like Ebay and Yelp have come far more thorough and trustworthy measures for verifying identity and credibility all over the world.

Bitcoin needs to be at the front of the ongoing movement to establish merchant directories and creating group consensus on credibility. The hive mentality is central to bitcoin’s success.

The central premise of bitcoin is that your money can exist totally independent of centralized controls. Many bitcoin users do not even know that their funds are subject to controls — not by a government per se, but by bitcoin banks.

For this experiment to actually achieve its potential, we must take seriously the charge to be decentralized. We need to educate users about how the network operates and what decentralization actually looks like. It is our responsibility to shift the norm away from business-as-usual and back towards the original purpose of bitcoin.

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Bitcoin and Why It Must Remain Decentralized

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