In William Shakespeare’s key play Hamlet, Polonius educates his son Laertes that he should “neither a borrower nor a lender be”. Bitcoin, the first widespread, virtual currency subverts this concept, ensuring that no one has to be buyer or seller beholden to a financial intermediary to make payments.
What is BitCoin?
Bitcoin works like a worldwide currency exchange platform, where you can sell goods or services or exchange fiat money to buy the virtual currency. You can also make payments with some businesses who accept Bitcoin and your privacy is ensured because you do not have an intermediary collecting your data and every transaction is ‘blind’.
You can use Bitcoin to buy any digital goods and services, including digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds.
Bitcoin is a whole Internet distributed ledger. You buy a section in the ledger by purchasing a number of slots in the ledger, either with cash or by selling a product and service for Bitcoin. You can leave the ledger by trading your Bitcoin to someone else who wants to buy into the ledger. Anyone in the world can buy into or sell out of the ledger any time they want – with no consent needed from a third party. The Bitcoin “coins” themselves are simply slots in the ledger, comparable to seats on a stock exchange, except much more broadly applicable to real transactions.
The Bitcoin ledger is a new kind of payment system. Anyone in the world can pay anyone else in the world any amount of value of Bitcoin by simply transferring ownership of the corresponding slot in the ledger. Bitcoin is a digital currency, whose value is based directly on two things: use of the payment system today – volume and velocity of payments running through the ledger – and speculation on future use of the payment system.
Is it a fad or disruption?
A number of analysts believed that the Bitcoin ledger could be more disruptive to the international financial system than the currency itself. A new report by research and consulting firm Celent, has found that ledger model could be used for a number of new purposes including public financial transactions, public documents and digital contracts. For example, another ledger type application has also arisen called Ripple. This ledger is used for open source payments protocol for real -time transactions in any currency,
The processing power required to make mining profitable is extremely high — the smallest current unit is a “Satoshi” which is one hundred millionth of a bitcoin. In other words, it’s not really something you can generate on a home PC to any meaningful level. Plus, other computers will be attempting to solve the same equations as yours, which means you invariably waste time crunching redundant numbers.
Bitcoin is also likely to have considerable impacts across three different areas -the financial reporting supply chain, bank innovation and payment process convenience for consumers.
Bitcoin is firstly going to influence the financial reporting supply chain including accountants, auditors and financial leaders. Bitcoin is easily open to sabotage – Bitcoin payment processors can createdistributed denial of service attacks, which mean that Bitcoin users cannot make payments across secure networks.
For example, 430 million in Bitcoin has been stolen over the past few years. However, Mark Rees of Bitcoin Magazine believes that this challenge pales in comparison to the US $180 billion lost in credit card fraud every year.
Another example was in Canada when a hacker with access to a Canadian internet provider hijacked net traffic from large foreign networks to steal more than $83,000US in virtual currency over a four-month period.
Researchers with the U.S.-based Dell SecureWorks said the hacker’s attack started last February and stopped in May, after the Canadian Internet service provider (ISP) was notified.
Bitcoin also has transparency issues for auditors trying to monitor it -transactions are ordered on the ledger publically, meaning that anyone could construct a cash flow statement based on the transactions. Financial professionals therefore need to ensure that any payments they make for themselves of someone else’s behalf uses a different email per transaction.
Bitcoin is lastly very hard for governments to tax because of confusion over whether it is a stock or commodity that should be subject to capital gains tax or whether it is fiat currency and should be treated as fiat currency as taxed as income.
Bitcoin secondly will strongly affect bank innovation – however, it will not cause widespread bankruptcies. According to Tom Hay, head of payments with ICON , Banks could start offering digital Bitcoin wallets on behalf of their customers, removing the IT learning curve for consumers and concerns about malware.
They could also provide more consumer protection in their data architecture that the current Bitcoin system.
Bitcoin is likely to ensure payments are simple and easy for consumers. However, the first hurdle the virtual currency will have to clear before it can do this is that it has to develop as a medium of exchange – much like PayPal and credit cards. Bitcoin is currently only a store of value so it cannot be used for mainstream purchases. There is a very fruitful opportunity to develop Bitcoin into a medium of exchange, if computer programmers and developers can work out how to exchange Bitcoin effortlessly between payment systems and across borders.
In fact, Bitcoin is gradually making progress as a medium of exchange in developing countries. While it can be volatile as an investment asset, it has real utility as an instrument for payment and money transfer, especially in places where conventional payment systems are immature. Since Bitcoin facilitates instant payment through peer-to-peer technology, most transactions can be completed in less than 10 minutes no matter how distant the two parties are. In addition, each transaction is recorded in a public ledger, enhancing transparency and trustworthiness.
In conclusion, Bitcoin has the potential to make ‘silent buyers and sellers’ of us all, should it become a mainstream traded currency. However, it first has to overcome its transparency issues and lack of medium of exchange. Another example of a development that could support or detract from the model is the Dark Wallet, introduced last year by co-founders Cody Wilson and Amir Taaki. The product is designed to provide privacy and protect users’ identities. Critics say its privacy protections could also facilitate money laundering. In the longer term, the Bitcoin community’s technology challenge is a matter of figuring out how to prepare and secure a monetary system for technology that hasn’t been developed yet.
Good for Consumers
To be sure, consumers are increasingly familiar with many of the concepts behind Bitcoin in emerging markets like parts of Africa, where alternative cashless payment solutions like M-Pesa’s mobile money are already popular. A recent survey by mobile payment company Jana found that over half of respondents from Asia and Africa expressed confidence in investing in Bitcoin. Consumer confidence is especially high in Kenya, home of M-Pesa, and 74 percent of Kenyan respondents said they would feel comfortable investing in digital currency.
The next step for Bitcoin seems to test the security of the platform through hackathons and collective programming events. Earlier in August, Money 20/20 announced the ‘Money20/20 Hackathon” to be held in the days prior to the start of the Money 20/20 conference, which officially kicks off on November 2nd.
The teams are tasked with creating applications based on the application programming interfaces (APIs) from “10 of the top innovators in the financial services sector.” Hopeful developers will be creating never-before-seen implementations from the APIs provided.
By working with Money 20/20, Chain.com and Blockchain.info will be at the forefront of Bitcoin’s latest push into the mainstream spotlight. While Bitcoin companies are always present at specified Bitcoin conferences, this year’s Money 20/20 conference will be one of the first times that two, not just one, Bitcoin companies’ APIs will be offered to developers on the same even playing field as Mastercard’s and PayPal’s.
In addition, many financial institutions are now setting up complaint centres. For example CFPB, the Federal Agency issued new warnings about the risks of using the nascent virtual currency, which is still subject to relatively loose regulation and is not backed by any central authority. The CFPB is urging consumers to be wary of wide fluctuations in Bitcoin exchange rates, potential hacking, theft and stolen funds.