Bitcoin, ‘the money for the internet’, is the most popular cryptocurrency today. The bitcoin is not meant to be a payment network, and neither is it ready to scale to the level of major payment networks. In its current form, the bitcoin network can only support up to 7 transactions in a second in comparison to Visa, which supports 2,000-4,000 transactions in a second. Although bitcoin can process a much higher number of transactions in a second compared to those it does today, it remains crumbled by current technical limitations.
Its technical structure and its freedom from regulation give bitcoin an advantage over existing payment networks. Although it serves the same purpose as Visa or western union, as the world’s first open financial network, Bitcoin may never truly become a payment network. Imagine a payment network that happens to have its currency, where no one owns or controls it and where there are no limits on how people can use it. A payment network should have regulations, a lot of regulations. This is because such regulations are put in place to make sure that people don’t use payment networks to support illegal activities.
For bitcoin to become a major payment network, it would need regulatory guidance and intermediaries to control payment flows from one party to another. Although it could survive such margins, bitcoin would become subject to isolation from the international financial system especially by states that have enormous control over their financial system. States would feel threatened by a decentralized payment system that they have no control over whatsoever.
Since modifications to the bitcoin require cooperation from nearly all its users, restrictive regulations could cripple the bitcoin, and it could also make it difficult to determine the percentage of users who would keep using it. Scaling the bitcoin is possible but developing efficient regulatory solutions while not impairing the growth of the Bitcoin could prove very difficult.
Another challenge that faces the bitcoin in scaling to a major payment network is the limitations of the original bitcoin block chain. The limitation of a block chain to one megabyte of data per block undermines the possibility of scaling it to a global level of a network payment system. It requires a major technical overhaul to reach the capabilities like those supported by Visa. Even though the technical overhaul is possible, who would decide what kind of change to impose bearing in mind that no one owns or controls it? The change itself could also undermine the core characteristic of Bitcoin as a cryptocurrency which is decentralization.
Re-engineering the bitcoin code could support thousands of transactions per second, but this would compromise its decentralized design. Discussion for such a proposal among the Bitcoin community could have no or little effect.
A currency independent of any government have no known solution to the economic or cultural issues it might face. While the bitcoin community fights over how best to increase the block size and the inter-block time, the reality is Bitcoin would gain no real position against major payment networks such as Visa or Mastercard.
For bitcoin to become a major payment network, it needs to reassure major states such as the U.S that a well-established payment method that no one controls will be no threat to them. It is practically impossible. It would be very interesting for bitcoin to figure out ways to operate without being shut by major governments. The very aspect that bitcoin is designed to allow users to transact with an acceptable level of privacy means it would face hostilities that would doom it as a payments network.
It is through points of control in the payment networks that government monitor who does business with who in order to fight terrorism funding and gain financial intelligence. To illustrate this lets us look at the US for example. Financial measures are one important way that the US government has protected the nation’s core interest. The world as we know it currently is defined by economic interdependence and financial measures have become an important tool in advancing foreign policy goals. The US and the EU have imposed sanctions in fighting Russia’s hostility against Ukraine. In so doing the economy of Russia have suffered a major blow.
Such sanctions are effective as many international transactions are settled across payment systems controlled by banks which are in turn controlled by governments. Now, think of a network payment system that allows its users privacy, has no control and no one to answer to. It would render sanctions useless; governments would gain no financial intelligence, there would be no telling who does business with who. It is practically impossible for bitcoin to become established as a major payment network system without total alteration of its core design.
Just like the internet, if bitcoin were to scale it would become impossible to contain. The beauty of the bitcoin is that no one can force a change on another. The same beauty dooms bitcoin into ever scaling into a major payment network at least not in the near future. Scaling the Bitcoin is a complicated concept that is only theoretical and which requires much more than just increasing the block size.