The Hassle of Converting Dollars (or Other Currencies) into Bitcoins

One common criticism of bitcoins is that it can be such a hassle to obtain them. Typically, you'll wait several days before you can buy bitcoins with your dollars through an exchange intermediary. People are often mystified by the fact that they can buy items on Amazon in 10 seconds but that it takes many days to buy bitcoins, no matter where people try to buy them.

Reversible Transactions

The reason, surprisingly, is that the world economy as it currently exists is built around contracts and reversible transactions. Transfers of financial value between two parties usually involve very similar steps, whether we're dealing with a credit card payment, check deposit, bank wire, stock purchase, or mortgage loan. Any financial asset that is typically tracked in a financial ledger (which nowadays includes most things besides paper cash) are handled in this way. The steps are as follows:

1. One of the parties, or both parties together, draft a legally-binding contract. Sometimes this contract is written out formally (such as when you initiate a mortgage loan) and sometimes it is made implicitly based on previously agreed-upon terms. For instance, when you enter your credit card information into Amazon, you are bound by a contract you signed ahead of time with your credit card issuer, a contract that stated that you would honor the debt incurred by using your credit card in this way.

2. The terms of the contract are broadcast to all affected parties. If you initiate a bank wire, your bank, as well as the bank receiving the funds, will be notified about the bank wire request. Similarly, someone selling decorative soaps on Amazon would be notified that you used your Visa card to purchase a bottle of raspberry hand soap. At this point, there is usually still some leeway for the parties to still opt out of the contract, in a time period which may be called a settlement period (or a hold or rescission period, depending on the type of asset and the exact circumstances involved.)

3. The purchased assets are delivered and financial records are updated.

After a period of time, once the banks have updated their ledgers, the balance from the bank wire shows up in the recipient's bank account. Similarly, your raspberry hand soap is handed off to the post office for delivery.

The crucial step in this process is that the information entered in the bookkeeping ledgers by your bank (or at E-Trade, the mortgage company, or the soap seller) is really meaningless in terms of determining who "owns" an asset—these ledgers have no legal bearing. The only way to know whether you own the money in your bank account, the money in your Paypal account, or a share of Google at E-Trade is to look at the original contracts. If somebody contacts your bank and says, "Actually, all the money in Bob's account belongs to me because Bob and I signed this contract that proves this is the case" and this person can go through the many legal hurdles required to prove that that money indeed belongs to her, Bob's money will not be safe at that bank. It does not matter whether the bank's internal ledgers say he is entitled to that money.

The bottom line is that because legal contracts almost always remain open to dispute and because ledgers maintained by banks, mortgage companies, E-Trade, Amazon, etc., are all subject to the legal system, it is reasonable to argue that our traditional financial system is based upon financial transactions that are reversible. Unless there are statutes of limitation that supersede the original contracts years into the future, the settlement period we mentioned in step two is indefinite.

This is true in theory and in practice. All of the following types of transactions can be (and frequently are) reversed by at least one person involved in the transaction days after the fact (and usually also weeks or months after the fact) :

• Bank wires

• Credit card transactions

• Mortgage loan contracts

• Stock purchases

• Check deposits

For some of these transactions, the only party that can reverse the purchase may be the larger, more powerful entity involved in the transaction. For instance, you may not be able to change your mind about the share of Google you bought a day ago, but you wouldn't be surprised to learn that E-Trade makes you wait 10 business days before pulling that share out of your E-Trade account and will be more than happy to take that share away from you if the bank wire you used to fund that share is reversed by your bank after the fact.

 
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