It can be lonely out there for a bitcoin aficionado, especially if you’re a banker.
Ask Alan Lane. Te October, the voorzitter and CEO of Silvergate Canap te Schuiflade Jolla, Calif., wasgoed up te Sacramento for a roundtable convened by the California Bankers Association and the state’s Department of Business Oversight. Reading a laundry list of about a dozen issues on the department’s radar, Commissioner Jan Lynn Owen mentioned Bitcoin – the Internet currency, payment system and technology that’s bot grabbing headlines, igniting controversy and inspiring innovation across the globe. Lane pricked up his ears, te part because the $616 million-asset Silvergate had bot te discussions about banking a Bitcoin startup.
",I raised my forearm and I said, ‘Is anybody else talking with any potential Bitcoin customers?’ There were a loterijlot of wit stares around the slagroom,", Lane recalls. ",A loterijlot of the bankers hadn’t heard of it. . One fellow, I don’t reminisce who it wasgoed, said, ‘I think they ought to outlaw it.’",
Lane’s reply: ",Well, if they outlaw it, I’m going to lose about $1,200 because I just bought Ten bitcoin.", Zometeen, he says, another banker friend taunted him, ",Uh oh, Alan, you shouldn’t have said that. You just waterput a target on yourself with the regulators.",
Lane had purchased the bitcoins with his own money, not spil an investment but to practice firsthand how the system works. Spil 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 te November, regulators, lawmakers and law enforcement officials all acknowledged that Bitcoin has legitimate and innovative uses spil a payments system. More recently, nationally known merchants like Overstock.com, Zynga and the Sacramento Kings basketball team have begun to accept Bitcoin payments. Even political candidates are taking donations through the system. Worldwide transaction volume keeps growing, spil does the number of Bitcoin users.
",If this becomes a valid means of exchange,", Lane says, ",then shame on us spil bankers for not understanding it.",
A true understanding of Bitcoin (uppercase ",B", for the payment system and technology, lowercase for the currency) means looking beyond its potential spil an alternative form of money. The network’s spoorlijn one day could conceivably provide a means of exchange for a entire lotsbestemming more than a stateless, digital currency – think stock certificates or property titles. For financial services, an industry predicated on trust te 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: the currency’s illicit uses ter online black markets, its mysterious creator, who went by the pseudonym Satoshi Nakamoto before disappearing te 2011, the bitcoin’s frantically fluctuating exchange rate with the dollar, its adoption by celebrities like the Winklevoss twins. 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 sultry volgers.
Savvier observers have considered Bitcoin’s merits spil a global, frictionless payment system one that offers an stijlvol response to many of the questions raised last year te a paper released by the Federal Reserve, ter which it called for public comments on how to modernize the country’s disco-era infrastructure for moving money.
",One of the reasons wij’ve got so many questions and why the Fed’s paying attention to fixing the payment system is that there are some deficiencies ter the payment system the way it stands now,", says James Wester, a research analyst at IDC Financial Insights. ",Bitcoin, almost by chance, it seems, has solved those problems.",
For example, Bitcoin offers near-real-time settlement, something the Fed says is ",desired increasingly by end users", and is ",generally lacking te many legacy payment systems.",
",Within 60 minutes at the longest, usually less, the money is lodged, and it’s lodged for good,", says Jeremy Allaire, the founder and CEO of Circle Internet Financial, a startup ter Boston that aims to make Bitcoin lighter to use for consumers and merchants. ",That is radically quicker than the settlement that wij see ter credit and debit transactions today. . From a merchant perspective it’s even better because they know they got the funds. It’s there.",
Another voorwerp on the Fed’s wish list that Bitcoin sates 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 toverfee, which usually amounts to pennies, for swifter confirmation.
Of course, buying and selling bitcoins for fiat currency, usually through online exchanges, can carry extra costs. Even so, using Bitcoin to transmit value can end up cheaper than legacy payment methods. An analysis last year by Adam Shapiro of Promontory Financial Group found that sending $1,000 from the U.S. to Europe to make a down payment on a vacation rental would cost $15 using the Bitcoin network (including commissions paid to exchangers), compared to $50 for a cross-border credit card payment and $40 to $80 for a handelsbank wire.
",You can’t look at that and say, ‘Well, that’s just crazy,’", Wester says. ",If it can help us address some of thesis issues, maybe even solve some problems, then maybe wij need to zekering talking about it te terms of bubbles and stuff like that.",
But even this appreciation of Bitcoin is old hat. Payments aren’t the half of it.
To get the total sense of why Bitcoin matters, you have to begin thinking of it not spil a currency, strafgevangenis spil a payment system, but spil a protocol that is, a series of rules for exchange of information among computers te a network. The applications wij all know and love are built on top of protocols. The World Broad Web, for example, wasgoed built atop TCP/IP, the protocol underlying the Internet.
The heart of Bitcoin is the blockchain, a decentralized, permanently updated public ledger detailing the history of all transactions on the network since its inception te 2009. The blockchain does not reside on any single server, it is maintained on thousands of computers around the world.
You’ve very likely heard of Bitcoin ",mining.", The term is something of a misnomer. The job is more like that performed by county clerks, except the miners do it competitively.
Mining computers essentially wedstrijd with one another to solve a ingewikkeld math problem necessary to record the latest block of transactions te the blockchain. The prize for winning the wedloop, which restarts harshly every Ten minutes, is 25 freshly minted bitcoins (plus any transaction fees senders have elected to pay for quicker settlement). This is why the process is called ",mining,", since it is how fresh bitcoins are added to circulation, akin to extracting gold or silver from the ground expect instead of elbow grease, Bitcoin miners expend electro-stimulation and processing power.
There’s no referee for this wedren. So who determines if a miner wasgoed very first to cross the finish line? The other miners. They accept a fresh block only if all the transactions ter it are valid that is, if no one has attempted to spend bitcoins they did not have and they communicate their acceptance by turning their attention to computing the next block. Majority overeenstemming substitutes central clearing.
By turning recordkeeping into a competition that participants anywhere can abandon or rejoin at will, with a monetary incentive to take part, Nakamoto aimed to permit any two people te the world to engage ter peer-to-peer transactions without relying on a trusted third party. If a miner te Oakland blows a fuse, counterparts from Iceland to Australia can pick up the slack.
",Bitcoin having no center means there’s no target to attack, there’s no concentration of power. Power is diffuse and distributed among the entire community,", says Andreas M. Antonopoulos, a technologist and entrepreneur ter the Bay Area who has emerged spil one of Bitcoin’s most fervent and articulate evangelists. ",There are no levers to pull, no points to compromise. 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 examined by anyone.
",A geek like mij can look at the source code, wij don’t care who wrote it,", says Gavin Andresen, the chief scientist at the Bitcoin Foundation, the den facto trade association for the Bitcoin network. ",Kleintje of like a mathematician relying on a theorem that wasgoed written by somebody they detest, you don’t truly care where the idea came from, you care about the idea itself.",
Te Bitcoin’s five years of existence, ",hundreds of utterly competent technical people have looked at it,", Andresen says. ",Both white-hat and black-hat hackers had a chance to attempt to pauze it, and nobody could.",
Spil the lead developer for the core Bitcoin software, Andresen is most likely the closest thing the community has to a figurehead. He says he and the foundation, formed ter 2012, have influence, but that the governance specimen for Bitcoin is ",very distributed, very liberate,", like governance of the Internet itself.
",The entire system is messy and chaotic and not top-down like a centralized system is. There’s nobody who’s 100% ter charge,", Andresen says.
And just spil the decentralized setup of the Internet permitted Tim Berners-Lee to invent the Web without asking anyone’s permission, the Bitcoin protocol has permitted innovative applications of the blockchain at the edges of the network.
A ordinary example is Proof of Existence, a notary service created by Manuel Araoz, a software developer ter Argentina. The webpagina permits anyone to embed a time-stamped cryptographic fingerprint, known spil a hash, of any document into the blockchain. The user can prove straks on that the document existed at a specific point te time, whether it’s a will, a contract, a property deed, a patent application, a screenplay or a love letterteken. Storing the proof ter the blockchain means there will be a voortdurend, ubiquitous public record of it.
To be clear: that doesn’t mean exposing the document itself. 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 gegevens. But you can verify that a given hash belongs to a certain gegevens set if you have both.
Even the smallest modification to the gegevens will result te a totally different hash. Apply SHA-256, the hashing algorithm used te Bitcoin, to the word ",pickle,", and you get the 64 character string 6d08a4e630e4aa0d5cd873e65aea0a23df42de61073ecb49ef17158fe6a9dcea. But the plural ",pickles", produces a very different string of the same length (3614e3639c0a98b1006a50ffe5744f054cf4499592fe8ef1b339601208e80066, should you be wondering).
",Having the technology provide a decentralized solution means you can trust that no matter what you’re using the application for, you can trust the gegevens anyway, because it won’t be modified by any third party,", says Araoz.
A more advanced idea ter development is colored coins. Thesis are bitcoins that have bot digitally marked te the blockchain spil carrying some secondary value. A colored coin could represent ownership of a stock, a unie, or another asset. Ter theory, Bitcoin could serve spil the backbone for a worldwide capital market where companies could kwestie securities while relying less on intermediaries like clearing houses.
",You combine the decentralized nature with the open ledger and the capability for two parties who don’t know each other to transact without having to have a trusted intermediary, and it indeed does open up the possibilities for Bitcoin being used spil a way to clear certain types of asset transactions,", says Barry Silbert, CEO of the Fresh York broker-dealer SecondMarket.
Aside from dispensing with certain middlemen and bookkeepers, such a market might be more resilient. ",It doesn’t rely on the Fresh York Stock Exchange, which can crash and does crash, or the Nasdaq, which can crash and does crash,", says Roep Luria, an analyst at Wedbush Securities who has studied the Bitcoin ecosystem. ",It relies on the distributed ledger that does not have one point of failure.",
Jonathan Mohan, the founder of BitcoinNYC, a Bitcoin community networking group te Fresh York, likens colored coins to a stamped envelope the bitcoin is the stamp that enables the contents of the package to travel through the postal system. Looking at the latest price of bitcoins, you might think $800 is pretty steep for a postage stamp. 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 spil a stock or unie, and then subdivide it into smaller onvriendelijk for distribution to investors.
Even more imaginative potential uses of the blockchain involve the interrelated concepts of wise property, clever contracts and programmable money.
Ter the basic Bitcoin transaction, if Bob wants to send Alice a bitcoin he needs two chunks of information: his private key, and an address generated from hier public key. 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 possessor or a rental company or a lender could configure a voertuig to turn on only if it receives a message signed by a private key that wields a colored coin.
",Were I to borrow money ter order to buy a Tesla,", says Luria, ",spil long spil I make my payments, that would be reflected by my canap to the blockchain and I would be able to proceed to operate my voertuig. But were I to zekering making payments on my car, instead of lawyers and debt collectors and repo boys getting involved if the blockchain wasgoed not to receive a message from the handelsbank that I’d made my payment that month they could disable the Tesla and fairly directly prevent mij from operating it.",
And since everything would be recorded te the blockchain, both parties could see exactly what happened, and neither side could deceive the other. No more ",check’s te the mail", excuses from borrowers, no more predatory acts by creditors, like failing to postbode a consumer’s payments ter 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.
Antonopoulos envisions Bitcoin eventually enabling a fresh field of ",computational law,", te which contracts which could include loans, asset sales or service agreements are written spil largely self-executing rekentuig programs, and much of the counterparty risk of business simply vanishes. That, Antonopoulos says, would leave lawyers ",much more focused on capturing and voicing the desires of the parties [te writing the scripts] rather than lodging the disputes or arbitrating the disputes on the back end.",
That’s a long way off, of course. Spil Lane witnessed at the California banker meeting, most U.S. banks are still wary of participating ter the Bitcoin economy even ter the most mundane way: opening deposit accounts for virtual currency exchangers.
",Every Bitcoin business has had at least one bankgebouw account shut down on them,", Tony Gallippi, CEO of the Atlanta payment processor BitPay, said at a conference last summer.
For many bankers, guidance released last year by the Treasury Department’s Financial Crimes Enforcement Network, which subjected virtual currency firms to the same know-your-customer requirements spil traditional money services businesses, hasn’t sufficed to liquidate the scarlet ",A", (for anonymity) from thesis startups.
",The challenge here with a loterijlot of the reluctance of financial institutions to provide banking services for Bitcoin companies, it’s because they need guidance from the regulators, too,", says Bruce Wallace, the chief operations officer at SVB Financial Group, parent of Silicon Valley Canap ter Santa Clara, Calif.
Spil you might expect from its name and location, this $22 billion-asset handelsbank is more favorably disposed than most to working with innovative companies and has a handful of virtual currency clients. But it’s not taking on any more.
",Wij’re challenged a little bit right now,", Wallace says. ",Wij need to spend more time on attempting to help regulators, attempting to figure out the right guidelines here with companies spil opposed to spending more time figuring out how to bankgebouw more companies.",
One punt that federal regulators need to clear up, he says, is how far a bankgebouw is expected to go ter monitoring its customers’ customers after they convert their dollars to virtual currency or vice versa.
",Today, if a consumer went into a canap, and they withdraw $Five,000 te specie, the handelsbank is absolutely required to know that they took $Five,000 te specie. But then, what they subsequently do with that, it would be unlikely for the bankgebouw to know,", Wallace says.
Bitcoin, which has characteristics of both specie and electronic funds transfers, does not cleanly getraind into either category.
",When you can’t see who they’re exchanging the bitcoin with, when all you can see is it’s just a wallet address,", Wallace says, ",it’s difficult for a financial institution to say, ‘Yes, wij can confidently report that wij eyed that transaction toebijten and wij witnessed that the other side of the transaction wasgoed with a legitimate third party that wij know the identity of, and wij know the reason that they did that transaction.’",
With the blockchain suggesting a trail of crumbs, it’s ambiguous spil to whether banks need to go after 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, spil long spil they provide clarity.)
But further regulation, warranted or not, presents a risk to Bitcoin achieving its total potential.
",No one government can shut Bitcoin down. No one regulator can shut Bitcoin down,", says Luria at Wedbush. ",But what governments and regulators can do is impede the progress and the innovation, especially te their country.",
Price volatility is another impediment to Bitcoin’s adoption spil a payment system. Processors like BitPay and Coinbase have made this punt manageable for merchants by instantly converting bitcoin payments to dollars for them, for a toverfee that still hits the credit card companies. But not knowing how much a currency will be worth from one day to the next could last adoption by consumers outside a core group of speculators, curiosity seekers and die-hard Bitcoiners.
",Volatility is certainly an kwestie and certainly a problem,", says Andresen at the Bitcoin Foundation. ",For it to indeed be a viable payment system, you do want it to be much more stable than it’s bot.",
Is stability attainable for a currency that, unlike most others, is not supported by any government with the power to tax its citizens (or ",backed by studs with guns,", ter economist Paul Krugman’s memorable phrasing)? Allaire at Circle Financial says the price could stabilize if institutional investors begin to get involved. Silbert’s rigid, SecondMarket, launched the Bitcoin Investment Trust last year for accredited investors, the Winklevoss brothers, famous for their wrangling with Mark Zuckerberg overheen the genesis of Facebook, are still awaiting SEC approval for their proposed bitcoin exchange-traded fund.
Spil a payment system, Bitcoin offers an attractive safety feature ter that it is a ",thrust", system, requiring an active step by the accountholder each time a payment is triggered. Tegenstelling this to ",pull", payments, where the consumer gives a credit card or handelsbank 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 te the Bitcoin network. Very likely the fattest long-term risk to the system is the possibility of a ",51% attack,", ter which one entity takes overheen the majority of mining power and wreaks havoc, perhaps by double-spending coins or preventing other users’ transactions from being processed.
Mining already has strayed from Nakamoto’s vision of ",one CPU, one vote.", Spil the business grew more competitive, miners formed pools, manufacturers introduced powerful chips, known spil ASICs, designed specifically for mining bitcoins, and the math problems became more difficult. The last year witnessed a duo of close calls te which a mining pool came close to controlling 51% of the processing power on the network. Realizing that the value of bitcoins depends on Bitcoin being managed by no one, the pool wisely cut back each time.
",There’s so much vested rente by all the participants for Bitcoin to be successful that even when wij treatment thesis types of levels, the system wants to self-correct so spil not to personages the entire network ter doubt,", Luria says. ",Absolutely this could be a point of vulnerability, but at least for now the stakeholders are attempting to manage that risk and steer clear of it.",
Andresen predicts that eventually mining chips will become cheap and plentiful, after manufacturers engineer them down to the tiniest, most energy-efficient size possible. ",Thesis chips will become ubiquitous. You might buy a opbergruimte of Cracker Jacks and get a Bitcoin mining ASIC unit,", he says. ",Just doing that will make mining much less centralized and much more . ‘one mining chip, one vote.’",
Even if Bitcoin gets taken overheen by a malicious actor, or is crippled by governments or by a price collapse, the idea is here to stay.
There already has bot a proliferation of other blockchain-based cryptocurrencies. Spil of mid-January, the webstek Cryptsy listed 117 ",alt-coins.", Many of them emerge to be pump-and-dump schemes, or spoofs like Dogecoin (named after an Internet meme featuring a Shiba Inu dog) and Coinye Westelijk (self-explanatory for anyone even vaguely familiar with either rap music or Kim Kardashian’s latest romance). But some crytopcurrencies, like Ethereum, which boasts a more sophisticated underlying programming language than Bitcoin, are evidently serious endeavors being designed specifically for advanced, smart-money applications.
Antonopoulos compares the invention of the blockchain to nuclear fission. ",There’s the discovery of fission, then there’s building an actual nuclear reactor and then there’s the electrical play that comes out of it. And everybody’s focusing on the price of the electric current that’s coming out of it, and they’re missing the point that fission ter itself switches physics, switches energy, switches everything, truly. Maybe you can verbod electrical play, maybe you can regulate reactors. But you certainly can’t make people leave behind that fission exists. And you can’t make that discovery vanish.",
Spil for Silvergate’s CEO, Lane, he isn’t banking any Bitcoin startups yet but he says he’s bot talking with Coinsetter, a virtual currency exchange with a compliance program he finds impressively rigorous. ",If wij can figure out a way to do it and wij can get our regulators convenient with it, wij’d be all for it,", he says.
Lane doesn’t expect too many of his peers ter banking to become spil quick a examine on Bitcoin. Even he finds it rough to carve out time to explore it and has yet to do much with the bitcoins he bought. ",There are a lotsbestemming of things that a handelsbank CEO has to worry about,", Lane says. ",I don’t begrudge anybody if they say, ‘Hey, if that truly takes off, I’ll learn about it but I can’t pursue every fly-by-night idea.’",
Still, ",of all the things you might get interested ter a given day,", Bitcoin, he says, ",touches all the things I’m interested ter, te terms of finance, technology, payments, and I said, ‘I should learn more about that.’ The more I learned, the more I said, ‘Gosh, this is pretty cool.’",
Marc Hochstein is American Banker‘s executive editor and oversees BankThink, a blog about ideas ter financial services.