The recent coinbase thefts have made me realize that we are going to have an uphill battle trying to get the average consumer to use bitcoins in place of credit cards. When I use a credit card, I have zero liability, so I am not overly concerned about theft or fraud. Bitcoins, on the other hand, are easier to keep safe, but there is always the possibility, no matter how small, that the password to my offline or cloud-based Bitcoin wallet will be compromised. If that happens, I instantly lose everything in that wallet, and that's scary.
So, I had an idea for how we could have the best of both worlds: What if we had another type of crypto coin that acted as a money substitute for bitcoin? You could call it a 'bitproxy' or a 'bitsubstitute'. This bixproxy would not be mined. Instead, the bitcoin protocol could be modified so that every bitcoin holder could create one, and only one, bitproxy. I could then deposit all of my bitcoins into a bank, and in exchange, the bank would give me bitproxies.
Unlike bitcoins, bitproxy transactions would not be final; they could be reversed by my bank at any time, just like credit card transactions. If someone gets their hands on my phone and steals the contents of my bitproxy wallet, no problem; I just call up my bank, prove that I am who I say I am, and my bank will transfer the bitproxies back to me.
Merchants would readily accept bitproxies, so long as those bitproxies were issued by a reputable bank. Periodically, the banks would finalize the bitproxy transactions by transferring the actual bitcoins to each other in a clearing process. A merchant would know that the transaction he conducted with me is final when the underlying bitcoins have been transferred from my bank to the merchant's bank.
Essentially, I am proposing a full reserve banking system, in which bitcoins act like the gold, and bitproxies act like a bank receipt for that gold. In addition, it would be impossible for a bank to engage in fractional reserve banking, because the bitcoin network would ensure that there is at most one bitproxy for every bitcoin at any given point in time.
Now, monitoring transactions for fraud requires time and resources, so banks will probably charge the merchants a transaction fee every time they accept bitproxies, just like credit cards. But, bitproxies would still be preferable to credit cards, for the following reasons:
- I don't have to reveal my personal information to the merchant
- The merchant does not receive the private key to my bitproxy wallet
- My bitproxies are 100% backed by bitcoins, so their value will not deteriorate as the government inflates the money supply
- I have the same fraud protection as I do with a credit card
This seems like such a great idea, I'm sure I'm not the first one who has thought of it. Does something like this already exist? Or are there some fatal flaws that I haven't thought of?
