PYMNTS Talk Back: The Bitcoin Breakdown
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Reading a laundry list big banks pulling back from bitcoinpymntscom about a dozen issues on the department's radar, Commissioner Jan Lynn Owen mentioned Bitcoin - the Internet currency, payment system and technology that's been grabbing headlines, igniting controversy and inspiring innovation across the globe.
One guy, I don't remember who it was, said, 'I think they ought to outlaw it. You just put a target on yourself with the regulators. Lane had purchased the bitcoins with his own money, not as an investment but to experience firsthand how the system works.
As Lane puts it, "How are you going to learn about this stuff if you don't step into it? Since that California bankers' meeting, learning about Bitcoin has seemed more and more worthwhile. At Senate hearings in November, regulators, lawmakers and law enforcement officials all acknowledged that Bitcoin has legitimate and innovative uses as a payments system. More recently, nationally known merchants like Overstock.
Even political candidates are taking donations through the system. Worldwide transaction volume keeps growing, as does the number of Bitcoin users. A true understanding of Bitcoin uppercase "B" for the payment system and technology, lowercase for the currency means looking beyond its potential as an alternative form of money. The network's rails one day could conceivably provide a means of exchange for a whole lot more than a stateless, digital currency - think stock certificates or property titles.
For financial services, an industry predicated on trust in third parties, the long-term implications of Bitcoin's underlying decentralized technology are staggering. Most news stories about Bitcoin have focused on its more tabloid-esque aspects: Online comment threads and Twitter conversations endlessly debate the red-herring question of whether bitcoins have any intrinsic value. Financial journalists view the phenomenon through a pinhole and shriek that the price is a bubble soon to burst, while the blogosphere's professional haters sneer at the libertarian leanings and somewhat fanciful predictions of Bitcoin's most passionate supporters.
For example, Bitcoin offers near-real-time settlement, something the Fed says is "desired increasingly by end users" and is "generally lacking in many legacy payment systems.
From a merchant perspective it's even better because they know they got the funds. Another item on the Fed's wish list that Bitcoin satisfies is cost reduction, particularly for cross-border transactions.
Transfers from one Bitcoin address to another are free, unless the sender elects to pay an optional transaction fee, which usually amounts to pennies, for faster confirmation. Of course, buying and selling bitcoins for fiat currency, usually through online exchanges, can carry additional costs.
Even so, using Bitcoin to transmit value can end up cheaper than legacy payment methods. The applications we all know and love are built on top of protocols. The big banks pulling back from bitcoinpymntscom of Bitcoin big banks pulling back from bitcoinpymntscom the blockchain, a decentralized, constantly updated public ledger detailing the history of all transactions on the network since its inception in The blockchain does not reside on any single server; it is maintained on thousands of computers around the world.
You've probably heard of Bitcoin "mining. The job is more like that performed by county clerks, except the miners do it competitively. Mining big banks pulling back from bitcoinpymntscom essentially race with one another to solve a complex math problem necessary to record the latest block of transactions in the blockchain.
The prize for winning the race, which restarts roughly every 10 minutes, is 25 newly minted bitcoins plus any transaction fees senders have elected to pay for faster settlement. There's no referee for this race. So who decides if a miner was first to cross the finish line? Majority consensus replaces central clearing. By turning recordkeeping into a competition that participants anywhere can quit or rejoin at will, with a monetary incentive to take part, Nakamoto aimed to allow any two people in the world to engage in peer-to-peer transactions without relying on a trusted third party.
If a miner in Oakland blows a fuse, counterparts from Iceland to Australia can pick up the slack. Power is diffuse and distributed among the entire community," says Andreas M. Antonopoulos, a technologist and entrepreneur in the Bay Area who has emerged as one of Bitcoin's most fervent and articulate evangelists. And that provides certainty for everyone. But why should anyone trust software whose own creator is a mystery? Importantly, Bitcoin is open-source, meaning the underlying code is public information, and can be inspected by anyone.
In Bitcoin's five years of existence, "hundreds of extremely competent technical people have looked at it," Andresen says. As the lead developer for the core Bitcoin software, Andresen is probably the closest thing the community has to a figurehead. He says big banks pulling back from bitcoinpymntscom and the foundation, formed inhave influence, but that the governance model for Bitcoin is "very distributed, very loose," like governance of the Internet itself.
And just as the decentralized setup of the Internet allowed Tim Berners-Lee to invent the Web without asking anyone's permission, the Bitcoin protocol has allowed innovative applications of the blockchain at the edges of the network.
A simple example is Proof of Existence, a notary service created by Manuel Araoz, a software developer in Argentina. The site allows anyone to embed a time-stamped cryptographic fingerprint, known as a hash, of any document big banks pulling back from bitcoinpymntscom the blockchain.
The user can prove later on that the document existed at a specific point in time, whether it's a will, big banks pulling back from bitcoinpymntscom contract, a property deed, a patent application, a screenplay or a love letter. Storing the proof in the blockchain means there will be a permanent, ubiquitous public record of it. Hashing is a one-way function; if all you have is the hash of a document, you can't reverse-engineer it to figure out the original data.
But you can verify that a given hash belongs to a certain data set if you have both. Even the smallest modification to the data will result in a completely different hash. Apply SHA, the hashing algorithm used in Bitcoin, to the big banks pulling back from bitcoinpymntscom "pickle," and you get the 64 character string 6d08a4ee4aa0d5cde65aea0a23df42deecb49effe6a9dcea. But the plural "pickles" produces a very different string of the same length ec0a98ba50ffefcffe8ef1be, should you be wondering.
A more advanced idea in development is colored coins. These are bitcoins that have been digitally marked in the blockchain as carrying some secondary value. A colored coin could represent ownership of a stock, a bond, or another asset.
In theory, Bitcoin could serve as the backbone for a worldwide capital market where companies could issue securities while relying less on intermediaries like clearing houses.
Aside from dispensing with certain middlemen and bookkeepers, such a market might be more resilient. But bitcoins are divisible to the eighth decimal point. So an issuer could conceivably acquire a thousandth of a bitcoin for 80 cents, tag it as a stock or bond, and then subdivide it into smaller bits for distribution to investors. Even more imaginative potential uses of the blockchain involve the interrelated concepts of smart property, smart contracts and programmable money.
In the basic Bitcoin transaction, if Bob wants to send Alice a bitcoin he needs two pieces of information: Anyone can send money to a Bitcoin address, but only a signature generated by the private key can release money from it. But what if the private key were a car key? A car owner or a rental company or a lender could configure a vehicle to turn on only if it receives a message signed by a private key that owns a colored coin.
And since everything would be recorded in the blockchain, both parties could see exactly what happened, and neither side could deceive the other. No more "check's in the mail" excuses from borrowers; no more predatory acts by creditors, like failing to post a consumer's payments in a timely manner. And the borrower needn't sacrifice privacy. Since Bitcoin addresses are pseudonymous alphanumeric strings, outsiders looking at the blockchain wouldn't necessarily know who the parties are.
All that would be visible is how many bitcoins have moved from A to B and when. That, Antonopoulos says, would leave lawyers "much more focused on big banks pulling back from bitcoinpymntscom and expressing the desires of the parties [in writing the scripts] rather than settling the disputes or arbitrating the disputes on the back end. That's a long way off, of course.
As Lane witnessed at the California banker meeting, most U. For many big banks pulling back from bitcoinpymntscom, guidance released last year by the Treasury Big banks pulling back from bitcoinpymntscom Financial Crimes Enforcement Network, which subjected virtual currency firms to the same know-your-customer requirements as traditional money services businesses, hasn't big banks pulling back from bitcoinpymntscom to remove the scarlet "A" for anonymity from these startups.
But it's not taking on any more. One issue that federal regulators need to clear up, he says, is how far a bank is expected to go in monitoring its customers' customers after they convert their dollars to virtual currency or vice versa. But then, what they subsequently do with that, it would be impossible for the bank to know," Wallace says. Bitcoin, which has characteristics of both cash and electronic funds transfers, does not cleanly fit into either category.
With the blockchain offering a trail of crumbs, it's ambiguous as to whether banks need to follow it or treat a bitcoin purchase like an ATM withdrawal. Wallace says he doesn't have a preference which side the regulators come down on, as long as they provide clarity.
But further regulation, warranted or not, presents a risk to Bitcoin achieving its full potential. No one regulator can shut Bitcoin down," says Luria at Wedbush. Price volatility is another impediment to Bitcoin's adoption as a payment system. Processors like BitPay and Coinbase have made this issue manageable for merchants by immediately converting bitcoin payments to dollars for them, for a fee that still beats the credit card companies.
But not knowing how much a currency will be worth from one day to the next could hinder adoption by consumers outside a core group of speculators, curiosity seekers and die-hard Bitcoiners. Is big banks pulling back from bitcoinpymntscom attainable for a currency that, unlike most others, is not supported by any government with the power to tax its citizens or "backed by men with guns," in economist Paul Krugman's memorable phrasing?
Allaire at Circle Financial says the price could stabilize if institutional investors start to get involved. Silbert's firm, SecondMarket, launched the Bitcoin Investment Trust last year for accredited investors; the Winklevoss brothers, famous for their wrangling with Mark Zuckerberg over the genesis of Facebook, are still awaiting SEC approval for their proposed bitcoin exchange-traded fund.
As a payment system, Bitcoin offers an attractive safety feature in that it is a "push" system, requiring an active step by the accountholder each time a payment is triggered.
Contrast this to "pull" payments, where the consumer gives a credit card or bank account number to a merchant or recurring biller, trusting that this third party will safeguard the information. Security breaches like the one Target suffered during the holiday shopping season highlight the advantages of a push-only system. But there are other potential weaknesses in the Bitcoin network.
Mining already has strayed from Nakamoto's vision of "one CPU, one vote. Realizing that the value of bitcoins depends on Bitcoin being controlled by no one, the pool wisely cut back each time.
Andresen predicts that eventually mining chips will become cheap big banks pulling back from bitcoinpymntscom plentiful, after manufacturers engineer them down to the tiniest, most energy-efficient size possible.
Even if Bitcoin gets taken over by a malicious actor, or is crippled by governments or by a price collapse, the idea is here to stay. There already has been a proliferation of other blockchain-based cryptocurrencies. As of mid-January, the website Cryptsy listed "alt-coins. But some crytopcurrencies, like Ethereum, which boasts a more sophisticated underlying programming language than Bitcoin, are apparently serious endeavors being designed specifically for advanced, smart-money applications.
Antonopoulos compares the invention of the blockchain to nuclear fission.
