The Problem Cryptocurrency is Trying to Solve

Sending money over the internet is different than sending other things, like emails. I can create infinite emails and send them to whomever I’d like, but I can’t just create money and send it to anyone. There needs to be a way to ensure money sent over the internet is real and not just created. As the internet has grown, we’ve accomplished this by relying on trusted intermediaries like Venmo, Visa, Paypal, and Mastercard. These companies have acted as the monitors, ensuring that people are sending money that they have as opposed to money that they have created.

We concede a lot to these third party monitors. We concede money, Visa and Mastercard take a 3% cut of all transactions that occur in their systems. We concede security, these companies’ data becomes a target of hackers who can try to credit their own accounts. We also concede privacy, as these companies are able to see how, when and where we spend money which they can use to make more money off of us by selling the information to advertisers.

Despite these concessions, these systems do work well in isolation. Every month my fiancée sends me her share of the rent over Venmo. It gets to my Venmo account instantly. This is because Venmo acts a trusted intermediary, validating that she has enough money in her account to send to me, and then it debits her account and credits mine. Venmo is able to act this quickly because it is a closed system and so they have access to every account balance on the Venmo network.

Problems arise when I try to leave the Venmo system. When I am ready to put the money from Venmo into my bank account, it takes 3–5 days. The reason the transfers take such dramatically different amount of time is based on who is validating the transaction. The system validating that Venmo, Paypal, Mastercard, Visa and your bank are sending money that they have is called the ACH, or Automated Clearing House.

ACH is a computer-based clearing and settlement facility established to process the exchange of electronic transactions between participating institutions. This is the backbone of the digital economy and it is huge. In 2015, ACH processed nearly 24 billion transactions with a total value of $41.6 trillion.

ACH is also inefficient and terribly slow to make improvements. It was built during the 1970’s and has seen few upgrades. It is still written in its original programming language called Cobalt that is rarely used anymore. Even though it is a computer system, it is only operational during banking business hours. The group is currently finishing off the final leg of multiyear project to get the transaction time down to 1 day, not moments like the rest of the internet! We can’t be sure if it’s due to incompetence or greed as the banking industry would lose lucrative features like $30 wire transfers if this system improved.

Cryptocurrencies are open source, community owned solutions to the problem the ACH attempts to solve. Different methods that we can use to prove we own money we send digitally without relying on third parties who don’t share our interests. The reason there are many currencies is that these solutions vary in their security, speed of processing, and privacy. We have not agreed on a solution, but the problem is not going away, and neither are crypto currencies.