It is often said that Bitcoin allows anyone to be their own bank. If you know anything about the Bitcoin ethos and the underlying technology, you've probably heard of this concept before. But do you know exactly how that works and why Bitcoin is more suitable as a store of value than your bank?
To get the full picture, it is important to understand how banks operate today, and how Bitcoin differs from the traditional financial system.
The problem with banks
The first problem facing banks is their precautionary nature, and with it the remortgage risks inherent in fractional reserve banking. If banks are merely a means of storing cash for their customers, their use is only implied Counterparty risk. Although this isn't ideal, it wouldn't necessarily be a problem if banks simply allowed customers' money to sit there, but that's not exactly what happens. To explain, banks lend your hard-earned money, and often buy government bonds to raise a return on that money. Sometimes, a bank may lend too much and not maintain enough liquidity to honor redemptions, and unfortunately, there's nothing you can do about it. If a bank collapses, your money often goes with it.
Not only that, but the traditional financial world is obscured. Simply put, traditional financial institutions must adhere to national and local regulations that place restrictions on how individuals can use their hard-earned currency. This problem is exacerbated in countries that impose strict capital controls. If government regulation can change quickly, your money in the bank could be at risk. Traditional banks and financial institutions, existing under the legal and regulatory regime imposed by their government, have no choice but to comply.
In any of these cases, you will lose through no fault of your own. Your money depends entirely on the integrity of the bank. This is a big risk. Banks have failed before and will fail again. Unfortunately, centralized financial institutions come with these types of risks.
Why is Bitcoin the solution?
To avoid this uncertainty, you want to store capital outside the jurisdiction of central entities. The only answer is to use a decentralized store of value, i.e. Bitcoin. Bitcoin circumvents these risks through some features that centralized financial institutions cannot provide.
no limits
Unlike banks, Bitcoin is borderless. You can access and use your funds in any country, and you can send BTC to anyone around the world. The beauty of borderlessness is that sending BTC to your neighbor costs nothing more than sending it to someone else on the other side of the world. Additionally, unlike banks, currency exchange fees are not necessary. Additionally, users can seamlessly conduct transactions across political jurisdictions due to Bitcoin's permissionless nature.
Peer-to-peer value transfer
The main difference between the traditional financial system and Bitcoin is the former's requirements for trusted third parties who facilitate transactions. This implies that a third party can approve or reject a particular transaction, hindering an individual's expression of financial agency. In contrast, Bitcoin's peer-to-peer network avoids intermediaries, allowing individuals to dictate transactions between each other unilaterally.
Property
An additional benefit of Bitcoin is the ability for individuals to control their funds through the power of cryptography. Basically, if someone has access to a particular Bitcoin private key, they can control the flow of funds from the public addresses associated with that private key.
As long as no one can access your private keys, only you can control your Bitcoin. Although there are challenges when it comes to storing your data privately and securely Secret key (created from a seed phrase), you can securely use this private key to sign messages and interact with the Bitcoin network. Although storing funds in a bank account allows a bank to lend or use your money, this is not possible with a non-custodial Bitcoin wallet. This is what true ownership is all about.
To be truly bankless, how you manage your bitcoins matters
If you want to go truly bankless, it's important to understand the intersection between traditional financial institutions and central Bitcoin custodians.
Centralized exchanges are companies registered in specific countries. As such, they must adhere to local laws and regulations, just like banks. Plus, it doesn't allow you to manage your private keys. The company can access your bitcoin at any time, just as a bank does with your fiat currency.
Any of these central institutions depend on the integrity of the banks that use them. They all involve counterparty risk. If you're using a cryptocurrency platform that relies on a bank, and the bank goes down, your money goes with it. So, if you are determined to go unbanked, make sure you take these aspects into consideration.
Challenges on the road to unbanking
To become unbanked with Bitcoin, you know you need to embrace self-custodianship, but custodianship is not the only challenge. Of course, Bitcoin works a little differently than fiat currencies, so going unbanked with Bitcoin also has its challenges.
Daily payments
Bitcoin's suitability as a store of value is unparalleled, but it can pose a challenge for everyday payments. Bitcoin's average block time is 10 minutes – meaning that a simple payment for an item like a cup of coffee is severely limited by Bitcoin's design.
However, there are solutions to scale up Bitcoin transaction speed and overall throughput. For example, Lightning Network,A Bitcoin layer 2 solution, provides near-instantaneous and global final settlement of transactions while minimizing the use of the Bitcoin base layer. While Lightning is limited by certain aspects of its design, such as the need to stabilize Bitcoin itself to close and open payment channels, a second layer like the Lightning Network opens up the potential to greatly expand the use of Bitcoin as a medium of exchange.
One proposal to overcome the limitations of the accelerator network design, as mentioned above, is to use Chaumian ecash, where the Federal Mint could issue certificates redeemable to users the way money once was, a certificate of deposit redeemable in gold.
In the e-money implementation, a network of federal mints will use Lightning to settle between each other, and retail payments will be made using the e-money itself. This means that Lightning could become a commercial solution to scale Bitcoin financial services, and that retail payments will be made based on solutions built on Lightning.
Widespread adoption
Of course, it is impossible to become unbanked with Bitcoin if it is not accepted as a medium of exchange. Currently, companies that accept Bitcoin are still in the minority in most places around the world. Initially, you may be looking for in-person and online stores that are willing to accept cryptocurrencies.
However, Bitcoin adoption is changing dramatically. While Bitcoin is still in its teens, countless major brands accept Bitcoin today. Disney, Playstation, Microsoft, Starbucks, KFC, Burger King: the list of Bitcoin-friendly companies is growing.
Your path to unbanked
In conclusion, not transacting with Bitcoin requires due diligence. For starters, you need a non-custodial wallet like a Ledger. But being truly unbanked doesn't end there. You should evaluate the platforms you use and how you use them. Finally, you should take measures to make your daily transactions more meaningful.
But, with these pieces in place, you're on your way to Vienna
