In essence, bitcoin cryptocurrency is an electronic cash payment system created as a counterbalance to today’s banking system. And new technology, as always, does not just appear. It appears where current approaches have become obsolete and are starting to stall.
The origins of the modern financial system lie in the early 17th century, when the Bank of England first issued banknotes and gave money the form of public debt. Although the banking system is rightly one of the most amazing inventions in human history, it was created long before the internet and has proven to be poorly compatible with it. If in the offline world this system still worked more or less well, with the advent of cryptocurrencies everything went wrong. After all, electronic payments are not easy to control, and control is critical. The reason is in the banking paradigm itself.
This is largely due to imperfections in the banking system itself, which involves the transmission of personal data through poorly protected (and sometimes simply unprotected) channels. In these conditions, fraud is flourishing, and the only way to fight it is to stop or cancel the payments. And to control it all, you need a whole army of intermediaries represented by banks.
A weakly protected system attracts fraudsters
For example, apart from bitcoin cryptocurrency we all have bank accounts with linked plastic cards. To pay for a purchase in an online store, we give the system all the data on our card – the name of the owner, number, expiration date and a secret code.
In principle, nothing prevents the site from taking the card details and using them in any way it wants. Sell it to someone on the Darknet for btc, for example.
On the other hand, when you enter this data on the website, the online store cannot check that it is really yours and is ready to accept the payment from a fraudster thinking it is you. SMS code systems (3D-Secure) only partially solve this problem because they are not supported everywhere. When paying by card offline, this is all irrelevant – today you can make purchases even without entering the PIN-code. Of course, all this inevitably provokes the growth of fraudulent payments, and to combat them, banks are constantly in touch with each other and are always ready to suspend or cancel the transaction.
Banks stand up to fraudsters, but not for free
Unlike bitcoin cryptocurrency, a lot of system resources are spent on constant negotiations and transactions approval – in fact banks need armies of employees engaged in unequal battles with a potential adversary. In addition to banks, payment systems – VISA, Mastercard, Stripe and others – also fight fraudsters. But obviously, all of them are not doing it for free. They simply add fees to all payments.
The cardinal solution is in the new blockchain based technology
Cryptocurrency and its first implementation in the form of blockchain was the foundation of a new financial paradigm. This paradigm promises to change the underlying foundations of the most immutable principle that has not changed in centuries – the way people exchange goods and services.