The problem with Bitcoin

Middlemen induced carrying cost is the main problem with Bitcoin and all public ledger based currencies.

Until a few years ago, paying a $2.50 fee to withdraw cash from the ATM was the norm. Fee-free withdrawal was available only at your local bank's ATM and that too was limited to a few withdrawals per month. Now, with credit union networks or by maintaining a certain balance, one rarely comes across ATM fees. Bitcoin takes us back to paying a fee, not just for a withdrawal, but for any transaction with it. Let's work out why this fee cannot be removed and why a better solution is needed for wider adoption of public ledger based currencies.

With cash, one central bank issues the currency, regulates its supply and checks for fraud such as counterfeit bills. Once the currency is printed, the cash could undergo many transactions before it comes back into the banking system. Verification is done at the point of transaction without the requirement of a public record of the transaction. For example, you buy groceries, you pay with the cash in your wallet, the grocery store clerk checks that it is familiar looking money and accepts the payment. The proof of the transaction is that you got your groceries and the grocery store has the physical currency you used as payment.

The problems with the central bank approach are: virtually unlimited paper money can be created by a small number of decision makers - thereby eroding trust in the currency, slower innovation by established financial systems such as SWIFT, periodic financial cataclysmic events such as the dot com crisis in 2000 and the housing bubble in 2008, etc. Having the inherent value of a currency tied to purchasing power is actually a good thing for a central bank with reserve currency, but not so much for countries whose currency does not get accepted beyond their borders. 

Bitcoin provides an elegant solution to many of the shortcomings of the current system and kudos are due to the early adopters for supporting the value of cryptocurrencies with real money. 

However, there are structural shortcomings to the current generation of cryptocurrencies. Let's start with the public ledger - a record of all transactions done on a coin, and in my opinion one of the biggest shortcoming. The reason for Bitcoin's public ledger is that since the currency is digital, it can be easily copied. To prevent copying, the transaction must be publicly validated and recorded so that if the same money is used for a different transaction, that transaction will fail. This carrying cost - of always remembering the transaction along with the actual cost of the transaction are unsustainable for widespread adoption. 

Although physical cash isn't "fee free" either, it is very likely always better than Bitcoin in terms of transaction costs. It takes resources to operate the mint, mine the metals to make coins, pay for law enforcement for checking compliance, pay salaries to central bankers, etc. Even if the world were to fully move to a cryptocurrency based society, these agencies would still be needed to some extent, so the current system is cost-neutral.

An ideal cryptocurrency would function with cash-like properties - uniqueness, fungibility, stateless verification and low transaction cost. Are there central bank issued cryptocurrency or quantum computing solutions that can address the above problems? 

I think than an algorithmically managed coin issuance scheme operating like a Decentralized Autonomous Organization (DAO) but operating under regular tuning by the Federal Reserve will be a strong candidate for the next generation US Dollar. Another option would be to stay decentralized but use the uniqueness guaranteed by the quantum mechanical property of teleportation. More of this later, perhaps when work-related downtime again aligns with the Christmas break. It's going to be a busy 2021.

Happy New Year everyone. 

Kuntal. 

PS - the US Congress did a great thing recently by passing the Corporate Transparency Act (CTA).  The lawmakers that deserve praise and support are: Carolyn Maloney, Mike Crapo, Sherrod Brown, Maxine Waters and Patrick McHenry.