CHULAK: Bitcoin reveals distrust in current bank system


Opinions Column: The Hard Truth

Recently there has been a lot of talk surrounding the emerging market of cryptocurrencies, most specifically Bitcoin. Bitcoin is a decentralized digital currency that was originally released as an open source software in 2009. Users are able to purchase bitcoins through various exchanges of currency from around the world. The system is entirely decentralized and relies upon a block chain, which is a shared public ledger of all bitcoin transactions. Transfers of bitcoins and all transactions are confirmed through a process called mining. In essence, users can purchase bitcoin and use it directly to make purchases or exchanges as opposed to working through a financial intermediary or institution like a bank. Users can also avoid costly taxes or transaction fees, while transferring their assets openly and freely.

Banks are the backbone of our financial system and allow individuals and businesses to safely deposit their money, obtain loans and invest in financial assets — but they do not come without issues. Banks have been notorious not only for charging excessive fees but also for engaging in predatory lending practices. The 2008 financial crisis is a direct and fairly recent example of how the irresponsible practices of big banks has had a negative impact on our economy. Even more recently, Wells Fargo was ordered by the Consumer Financial Protection Bureau (CFPB) to pay $185 million for secretly opening unauthorized debit and credit card accounts for customers. The inherent instability of our financial markets along with a growing distrust of big banks and Wall Street have both lead to the demand for cryptocurrency. 

Although Bitcoin theoretically eliminates the need for banks, cryptocurrency has its share of problems as well. Since transactions are completely anonymous and independent, Bitcoin has become a prevalent tool for money launderers, drug dealers and other high-level criminals. The use of cryptocurrency has made it increasingly difficult for prosecutors and law enforcement to combat crime, because many if not all the transactions conducted leave no paper trail and are protected though encryption. The anonymity of these transactions allows criminals to quickly and discreetly move around funds while avoiding taxes and accumulating assets. Although there may be plenty of bitcoins users who are operating safely and responsibly, there is no denying that cryptocurrency can be a significant contributor to organized crime. 

Additionally, since Bitcoin is unregulated, there is no way to guarantee that those who invest in cryptocurrency will have their original investment insured. Since the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2011, the Federal Deposit Insurance Corporation (FDIC) insures all amounts up to $250,000 in U.S. banks. Unlike Bitcoin, in the case of any bank failure or malpractice, an individual’s deposit will not be lost under this law. This is important because many investors have been attracted to Bitcoin because of its rising value and exchange rate. This week Bitcoin has surpassed $10,000 and has risen nearly 900 percent since the start of the year. Investors love this quick growth trend, but if Bitcoin is going to be a legitimate store of value, there must be some price stability. Think about it like this — imagine you went to the store and bought a jacket for $30 and a few days later you realized it doesn’t fit right. Naturally, you go the store and return it, but now that same exact jacket is worth $40. How much do you get back? How much is your jacket worth? How do you rectify the difference? As Bitcoin grows in popularity and value, these are all questions that will have to be addressed. Unless there is some sense of stability in the market and the value of the currency, bitcoin, for now, is not a sustainable exchange of value.

It is important to note though that the fundamental problems that Bitcoin seeks to address are growing wealth inequality and the distrust of global financial institutions. Bitcoin can be a valuable tool in addressing income inequalities and providing equal access to both currency and capital. Secondly, bitcoin can certainly be used to mitigate the influence of big banks and to promote equality in the market, but for now the cryptocurrency is too unpredictable and unstable. Instead efforts should be focused on reforming banks and strengthening financial regulations. If trends continue, the U.S. will continue moving towards a system of oligarchy where a few at the top control a majority of the wealth in our nation. This is not only an economic disservice, but also a social injustice that needs to be addressed. Cryptocurrency may very well be the future, but for now we should focus on improving our current system by emphasizing consumer protection and institutional accountability. 

Daniel Chulak is a School of Environmental and Biological Sciences junior majoring in environmental and business economics with a minor in German. His column, "The Hard Truth," runs on alternate Thursdays.

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