Could Bitcoin replace banks?

Bitcoin holders have been criticized for the reliability of their payments network, distributed among all mining coins on computers. BlockFi, a cryptocurrency lending company, has requested more restraint, stating on Twitter only that cryptocurrency payments are continuing to operate normally.

Read Also: Is Institutional Support Coming to Bitcoin?

One of the arguments in favor of buying and holding bitcoin is that cryptocurrencies will eventually replace the banks themselves, as their services will not be needed to store and transfer money.

This, in turn, would make Bitcoin so valuable that it would replace "dirty" dollars as currency, leaving those with Bitcoin in possession of only real money. Holding any asset in hopes of becoming money is definitely a long-term investment strategy.

But it also shows a misconception of how dollars work, and who is now making them. Most of what currently operates like money in the United States and any developed economy that does not come from the government.

It comes from commercial banks. Banks don't keep money or just transfer it. They make it. The misunderstanding about this is widespread enough that in 2014 the Bank of England issued a paper entitled Creating Money in the Modern Economy to clarify things.

University textbooks teach that banks take deposits, then loan them out. The Bank of England stated that this is completely the opposite. The commercial bank decides to provide the loan first, then increases the balance in your account.

This increase is brand new fiduciary money. The so-called "paper" money mocked by Bitcoin supporters is usually defined as government-issued currency and not backed by assets like gold.

However, a great deal of the paper cash, which we use for purposes like settling charges, is really a gathering of credits, directed by governments yet delivered by business banks. Making new credit cash is a decent business, which is the reason, without fail, individuals have discovered better approaches for making advances.

American historian Rebecca Spang notes in her book Stuff and Money in the French Revolution that the monarchy in pre-revolutionary France, to circumvent usury laws, took lump-sum payments from investors and paid them for life rents.

In 21st century America, shadow banks imagine they are not banks to maintain a strategic distance from guidelines. Loaning happens. You can't quit loaning. You can't stop it with appropriate processing, or with co-center. Benefits are generally excellent.

This is something that investors already understand about Bitcoin. Take, for example, Prince’s BlockFi. The company is launching a credit card, which is a joint venture with Visa. The card rewards purchases with Bitcoin in lieu of flying miles.

However, purchases are paid for with a consumer loan, like any other credit card. Nexo, another cryptocurrency finance company, will lend cash in exchange for Bitcoin, at a 60 percent loan-to-value ratio.

This loan is brand new fiduciary money. Likewise, Kraken Financial, a cryptocurrency brokerage firm, will allow you to trade on a so-called margin account in which it will loan you a portion of the currency's purchase price.

The language of these companies is all revolutionary. BlockFi promises the future of finance. Coinbase, a cryptocurrency exchange that was submitted for an IPO on Thursday, wants to create a financial system open to the world. However, what they all seem to do is earn fees and interest on loans.

They are making paper credit money. Why don't they? It's a good job. Bitcoin turns out to be a good way to bolster the system we already have. There is a lot about this poorly functioning system. The supply of credit money can be unstable, as banks stop providing loans in a downturn when people most need them.

There are few incentives to offer cheap credit to people who need small loans. But there isn't much, as yet, that Bitcoin appears to have done to fix these things, and it's not at all clear what that would be. Making cash credit better for everyone is just that: business. Patient organization is required.

You get to go out into the world and meet people outside of the financial system, and then encourage the lenders to offer products that will bring them into it. It takes tough negotiations with people who earn a lot of money lending money. 

None of this will happen on its own just because there are new assets in the world. Bitcoin lenders promise something like a new political party - healthy money for people! So far, it looks like they're just another group of bankers.

Crypto Exchange asks customers to return Bitcoin with 88% discount

What Happened: The largest crypto exchange in Southeast Asia, Philippines-based PDAX, experienced a technical failure that led to Bitcoin trading at $6,000 – an 88% discount to its current price.

Following the incident, PDAX asked its customers to return their Bitcoins, threatening legal action, a local news outlet Bitpinas has reported.

According to the exchange’s CEO, the system error was not due to a hack but a technical “glitch” caused by a massive surge in trading activity.

Why It Matters: The initial outage is said to have taken place on February 18; however, since then, reports have surfaced on social media of customers being locked out of their exchange accounts and being asked to “return their Bitcoin.”

“After almost 24 hours, they sent me a demand letter and SMS, requesting me to transfer back the BTC, or they “may” be compelled to take legal actions against me.” said one trader who believed his purchase was well within his rights without violating any laws or regulations of the trading platform.

Rafael Padilla, an attorney representing the affected users who are currently locked out of their accounts, commented on the issue on Facebook.

According to Padilla, PDAX has opted to lock users out of their accounts because it cannot unilaterally reverse the transactions.

An official statement from PDAX claims that 95% of accounts have been restored, but according to the report, many users are still locked out of their accounts.

It’s very understandable that a lot of users will feel upset they were able to buy what they thought an order was there for Bitcoin at very low prices. But unfortunately, the underlying Bitcoins were never in the possession of the exchange, so there’s never really anything there to be bought or sold, unfortunately.