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BITCOIN Capital International Group
REDEFINING CURRENCY
Over the past several months, an exhilarating technological and financial revolution has been taking place in the methods people are using to spend and receive money. The initiator and leader of this revolution has been Bitcoin.
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Contents
?
Introduction
4
What is Bitcoin?
7
The Origin of Bitcoin Historical Timeline
The Life of a Bitcoin
8 10
13
The Life Cycle of a Bitcoin
14
Where can I buy Bitcoins?
17
How does a Transaction work?
18
The other side of the Bitcoin
20
The Process
25
How are new Bitcoins created?
26
The Blockchain
28
Who controls Bitcoin?
30
The Economy
33
Bitcoin and Banks
35
How do consumers use banks?
36
Bitcoin’s money supply
38
Speculation, inflation and deflation
44
Bitcoin for business
47
Isle of Bitcoin
49
Isle of Man and Bitcoin
51
Interview with Charlie Woolnough
52
The Future
55
“Smart” contracts
56
What is Ripple?
61
Barriers to adoption
62
Conclusion
64
Case Studies
67
Investors and Backers
69
Silk Road
71
The Exchanges
72
Interesting Stories
74
Sources
76
“Right now Bitcoin feels like the Inter net before the browser� Wence s C a sa re s Fo und e r o f B a n c o Le mon
Introduction
A Taster to the World of Bitcoin Over the past several months, an exhilarating technological and financial revolution has been taking place in the methods people are using to spend and receive money. The initiator and leader of this revolution has been Bitcoin. What’s more this has been accomplished with no central authority in control of Bitcoin’s infrastructure, in contrast to traditional currency which is regulated by governments and circulated by banks. The previous necessity for trusted third parties who process payments and act as mediators has been abolished. Bitcoin, both as a currency and technology, offers exciting opportunities and potential risks for all forms of businesses, especially those in the financial industry. Comprehending and anticipating these new and emerging digital currencies in a proactive manner could be vital to sustained business success in a world which is becoming more globally connected, border less and digital due to the progressions achieved by the internet and technology. In considering these trends, the current centralised financial institutions appear to be redundant in their approaches, particularly on the web.
Bitcoin resembles and fills the conditions of these changes in a far superior way to its outmoded counterparts. Bitcoin or a future descendant could play a starring role in digitalising money resulting in a new financial revolution, analogous to the rise of email and the improvements it made in communications. This report will cover a wide range of topics related to cyptocurrencies with a focus on Bitcoin - beginning with simpler concepts and progressing into more complex detail. Firstly a historical overview of Bitcoin’s emergence and life cycle comparisons with traditional currency will provide a contextual foundation to base the report. We then move into technical explanations of the technology and how you should use Bitcoin. Furthermore an insight is provided into Bitcoin-orientated businesses and a detailed analysis of the implications of cyptocurrencies in the global economy, the island, particularly the financial sector and more! This report was completed over a period of three weeks during the Summer of 2014. We - the authors - hope that you enjoy the content and it helps you in furthering your knowledge of this emerging phenomenon.
George Barnes Alex Long
Will Tipper
Redefining Currency | 5
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“It’s money 2.0, a huge, huge, huge deal” C ham a t h P a l ih a p i t iya P rev i o u s h e a d o f A OL In sta n t Me sse n ge r
What is Bitcoin?
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? The Origin of Bitcoin Bitcoin first emerged from the internet in October 2008. A person or group going by the pseudonym Satoshi Nakamoto published a detailed design paper titled “A Peer-to-Peer Electronic Cash System”, which outlines the newly devised Bitcoin protocol. The identity of Bitcoin’s creator still remains a mystery.
“A strong community of developers slowly formed around the infantile digital currency” Bitcoin was officially launched in January 2009 with the public release of its source code, home website and client software; required for transactions and the generation of new coins. A strong community of developers slowly formed around the infantile digital currency. They are resilient advocates for Bitcoin and importantly, cooperate together in fixing major faults initially exploitable within the software. It will be insightful to explore the context behind Bitcoin’s inception. The currency’s core technology and its envisioned usages originate from a large and well-established movement which advocates the application of cryptography - the process of encrypting data - to establish freedom and privacy from governments; an act guaranteed by mathematics and physics in contrast to the traditional system of laws prescribed by government.
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The political and social force collectively known as Cypherpunks, “cryptographers with attitude”, has recently experienced an upsurge in support primarily because of the catastrophic global financial crisis of 2008. This event has fuelled many people’s apparent distrust and even contempt towards traditional financial establishments and government authority. Bitcoin has been shaped by this context and therefore most early adopters (and many to date) found Bitcoin supportive of their political inclinations; which range between libertarianism and anarchism.
“It is a product of its environment; a system which inherently acts to challenge and subvert banking institutions and government control in regards to finance” As a technology, cryptography has facilitated people in satisfying their political agendas. If it wasn’t for Cypherpunks and their political goals it is unlikely Bitcoin – and the plethora of other electronic currencies now – would exist at the moment. Adoption of Bitcoin has since skyrocketed and people’s political leanings are now more assorted. Nevertheless how Bitcoin operates is the same as always – in short, it is a product of its environment; a system which inherently acts to challenge and subvert banking institutions and government control in regards to finance.
What was there before Bitcoin? Before Bitcoin gained popularity the thing that most closely resembled a cryptocurrency was e-gold. E-gold was founded in 1996 and held physical gold which users could trade and buy between e-gold accounts in amounts as small as one ten-thousandth of a gram, making microtransactions a natural application. To give an idea of just how popular this was, by 2009 approximately 5 million people were using the site. However, the site was suspended due to legality issues; the company was sued for operating without a license and money laundering. There have been several other companies similar to this including eBullion. The US government, after a high-profile court case involving the founders, seized all of the company’s assets. Part of the fault with these enterprises was that they were backed by a physical item and a central authority in control. This meant that there was a limit to the trading that could take place on the sites but also the government had an easy target when it came to shutting the businesses down - as they became a threat to the status quo.
Redefining Currency | 9
? Historical Timeline
October 31, 2008
The white paper is published. Satoshi publishes a design paper. He describes the Bitcoin currency and solves the problem of double spending to prevent the currency from being copied.
2008
2007
2007
Work Begins.
Satoshi Nakamoto began working on the Bitcoin concept in 2007. It is speculated that he may be a collective pseudonym for more than one person.
Price of Bitcoin
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February 6, 2010
A currency exchange is born.
January 9, 2009
The Bitcoin Client is released. Version 0.1 of the program is launched. Allowing users to generate, send and receive Bitcoins.
2009
January 3, 2009
The first Bitcoins are mined
Block 1, also known as the “Genesis Block”, is created by Satoshi at 18:15:05 GMT.
2010
The Bitcoin Market is established by dwdollar as a Bitcoin currency exchange.
October 5, 2009
An exchange rate is established.
New Liberty Standard publishes a Bitcoin exchange rate that establishes the value of a Bitcoin at $1 per 1,309 Satoshi’s, using an equation that includes the cost of electricity to run a computer that generates Bitcoins.
July 17, 2010
MtGox is established.
One of the largest exchanges and one of the reasons for the increase in popularity of Bitcoin. For more information see the case study on Exchanges.
$1,150
$930
September 27, 2012
Bitcoin Foundation begins. November 6, 2010
Market cap exceeds $1 million. The Bitcoin economy exceeds US$1 million. The price on MtGox reached $1 per 2 Bitcoins.
May 22, 2010
10,000 BTC spent on a pizza.
The first real-world transaction using Bitcoins takes place when Jacksonville, Florida programmer, Laszlo Hanyecz, offers to pay 10,000 Bitcoins for a pizza on the Bitcoin Forum. At the time, the exchange rate put the purchase price for the pizza at around USD$25. Today that number of Bitcoins would be worth $6,215,000 or 248,600 pizzas.
March 28, 2013
Market cap reaches $1 billion. The total Bitcoin market cap passes $1 billion.
The Bitcoin Foundation is formed, implementing a core development team for the protocol and a body to oversee the digital currency. For more information see “Who controls Bitcoin?�, page 31.
2012
2011
2014
June 19, 2011
Major breach at MtGox.
$620
2013
MtGox suffers a significant breach of security that results in fraudulent Silk Road trading and requires the site to be opens for shut down for seven days. The breach business. compromises the MtGox database For more with a leak of the user table that coninformation see tains user names, email addresses, the case studies and password hashes of 60,000 on Silk Road and accounts. Investors and Backers. 2011
November 19, 2013
Bitcoin goes above $1000.
Bitcoin price surges to a record of $1242 on MtGox after Senate hearings. This gives Bitcoin a total market cap of $11.4 billion.
$240
$30
Redefining Currency | 11
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“Eve ry informed person needs to know about Bitcoin because it “It will be ever ywhere and the world might be one of the world’s most will have to readjust a just. important developments” World governments will have to Leo n L o u w readjust” N o bel P e a c e p riz e n omi n e e
John McAfee, Founder of McAfee
The Life of a Bitcoin
The Life Cycle of a Bitcoin The diagram below is a brief life cycle of Bitcoin compared to a traditional fiat currency, such as pound sterling or the dollar. This will help you in comparing the two forms of money; highlighting their similarities and differences from their creation to usage.
The word “fiat� means an official order by someone who has power. In the context of currency, the term refers to when a government decrees that their currency is valuable and is authorised as legal tender. It is not backed by valuable metals like gold.
Decentralised Mint
Local Storage
Miners are people who use computer power to process transactions and solve mathematical problems. The first miners to figure out the correct solutions are awarded a set amount of Bitcoins. People generally buy and sell Bitcoins on online exchanges.
Programs known as wallets are used to store Bitcoins on your computer or mobiles. They offer password protection. You can also backup your Bitcoins with removable storage devices or alternatively just print them on paper.
Online Storage There are many services on the web where you can store your Bitcoins. These services are native to exchanges.
Bitcoin
Creation
Custody
Bank Accounts
Fiat Currency Centralised Mint Traditional fiat currencies are issued and sometimes printed by the mint, by order of the central bank then distributed through the high street banks.
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Fiat currencies are kept in custody by banks who then give interest to those who deposited the money, promising to repay them on request.
Piggy Bank Alternatively cash can be stored by individuals in its physical form without the use of a bank.
$
Peer 2 Peer Transfer
Out of Circulation
Bitcoin transactions are sent directly from the sender’s address to the receiver’s address.
The only way that Bitcoins can be removed from circulation is if the hardware that holds the wallet containing the Bitcoins is lost, destroyed or the password is forgotten. Unfortunately little to no distinction can be made between those Bitcoins in storage and those that have been lost.
This process is instant and takes around 10 minutes to fully confirm. Transactions are not verified by any authority such as a bank or other financial institution, meaning there are little to no transaction fees involved.
Transaction
Cancellation
Bank as a Middleman
Recalled by Mint & Naturally Destroyed
Either a bank will act as a centralised middleman of transactions or cash is paid directly between parties. This can be done through check, credit card or in cash. Transaction fees are charged if banking services are involved.
Fiat currency units are cancelled when they are recalled by the central bank for being out of date or when the physical notes or coins are destroyed.
Redefining Currency | 15
“[V irtual Currencies] may hold long-term promise, particularly if the i nnovations promote a faster, more secure a nd more efficient payment system� Ben B e r n a n k e C hai r ma n o f t h e F e de ra l Re se rve
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Where can I buy Bitcoins? The most widely-used option is to use an exchange. Just as a traditional exchange allows you to buy one currency with another, you can buy Bitcoins using sites such as Coinfloor, Netagio, or Ripple. Each exchange is a little different. For instance, Coinfloor and Netagio both have cold storage facilities for customers but with Netagio you can trade with gold in addition to sterling and bitcoin. Ripple does not have cold storage but it does allow a vast array of world currencies to be used because of its structure as a network. Transaction fees can also be different between sites for deposits, withdrawals and transfers.
This is known as an order book system. On others there is a set price at which you either buy or sell Bitcoins through the company running the exchange. The company sets the buy price of Bitcoin above the sell price in order to make a profit. This is known as a trading desk. The main difference is that buyers and sellers have to go through the company running the exchange in the trading desk model whereas they can operate directly with each other in the order book system.
A select few can offer safety of deposits because they operate within regulation, such as Bitcoin-Central. Others, like CoinCorner, enable you to purchase multiple cryptocurrencies (in this case Bitcoin, Litecoin and Dogecoin).
“Ripple allows a vast array of world currencies to be used because of its structure as a network� On some exchanges buying and selling prices are listed as orders and are accepted by individual buyers or sellers.
Redefining Currency | 17
How does a Transaction work?
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address: DM ily’s
Wallets and Addresses Bruce has a Bitcoin wallet on his computer and Emily, on her mobile. Wallets are files which can hold multiple Bitcoin addresses and can be securely protected.
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rT8Lcd
Ljw
ChgKTncviy L
MF 53
dress: 1Mc i4 ad
Rb
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Bruc
s
W
2AosD ex W
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W 2g ks
E
To explain how this technical process works we will need the help of Bruce and Emily. Bruce is an online merchant and has just started accepting Bitcoin as a payment method. Emily is a buyer and Bitcoin user. She wishes to purchase merchandise from Bruce.
An address is a unique string of letters and numbers, for instance Bruce’s address is: 1Mci4RbjVUiX3bZ4sN53MFrT8Lcd. It is similar in principle to your email address. Each address has its own balance of Bitcoins which were allocated to it from previous transactions.
jVUiX3bZ4sN
Can you show me your address? Submitting the Payment Emily asks Bruce for his current Bitcoin address so she can send a payment to him. Emily opens the Bitcoin app on her mobile. From here she gains access to her Bitcoin wallet and the subsequent addresses it holds. Emily tells her Bitcoin client to transfer the required amount from her address to Bruce’s.
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1010101010101010 Cryptography Basics 10101010101010 Private and Public Keys Literally “key” to the security of Bitcoin’s payment system. When you create a Bitcoin address a unique pair of private and public keys are generated. The private key is stored in the user’s wallet, and the public key represents the address. These keys can be used for several tasks, but the main one used in here is authentication. Hello World
Locked Message
Hello World
Message
Message
n67n54 6l10xf15 Private key locks message
Public key unlocks message
The underlying principle is you can sign a message with your private key (that only you know) and this signed message can be verified using your public key (that everyone knows). The public key allows anyone to verify a message signed with the private key is valid as they are mathematically linked, however the function of the keys cannot be reversed.
Signed with key
Emily’s Private Key
Verifying the Transaction Emily’s wallet holds the private key for her addresses. The Bitcoin client signs Bruce’s public key with the private key of the address she is sending Bitcoins from. The output of this intricate cryptography is verified using Emily’s public key. It matches Bruce’s public key and the transaction request is accepted. This is because only Emily possesses the private key of her address and therefore the transaction request came from her.
Bruce’s address: 1Mci4RbjVUiX3bZ4sN53MFrT8Lcd
Bruce’s address
This protocol is extremely secure and would take even current supercomputers many years to generate the required private keys. Transaction request verified
Emily’s Public Key Bruce’s address: 1Mci4RbjVUiX3bZ4sN53MFrT8Lcd Redefining Currency | 19
The other side of the Bitcoin This section deals with a variety of frequent and pertinent questions often asked about Bitcoin; touching on themes of security, protection and price volatility.
An example of protecting a wallet with a password in the official Bitcoin client How do I keep my wallet secure? There are several options for keeping your Bitcoins safe. If you have a wallet on your computer then you should encrypt it by setting a password. Nearly all Bitcoin clients offer this feature. If a wallet is encrypted there is little possibility of the wallet being hacked. However, given Bitcoin’s strong security, if you forgot the password there is no way of gaining access to the wallet and Bitcoins contained inside.
In regards to physical forms, some Bitcoin clients have implemented features to print out a paper copy of the private keys contained in wallets. These methods allow you to regain access to your Bitcoins if you ever lost access to the original wallet file on your computer. The last option is trusting a third party service to hold your Bitcoins for you. All exchanges, albeit with varying levels of security, will hold your Bitcoins so you don’t have the risk of losing them yourself. The major problem with this is that if the exchange collapses or is hacked you will most likely not be reimbursed because there are currently no regulations to ensure customers are protected in such scenarios. Unfortunately there are many horror stories of people losing access to their Bitcoins because they do not take out these simple but effective precautionary steps to protect themselves. It is recommended you use a range of methods, so you would not be wholly dependent on one backup.
Additionally there is cold storage and converting to a physical form. With cold storage, a copy of the wallet is made onto external storage such as a USB stick.
Cold Storage: A paper wallet and USB sticks for backing up wallets
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1200
800 600
Average Exchange
400
Just how volatile is Bitcoin? Very. One of the reasons that it is so volatile is that, the price is based on speculation and events in the Bitcoin universe. A period that best demonstrates this is from October 2013 to February 2014. October was a bubble period where prices reached a record high of over $1,000 from wild speculation. At the end of 2013 and the beginning of 2014 two significant events took place: the collapse of Mt Gox and the announcement by Chinese banks that they would not accept any Bitcoin-related activity, which brought the price down again. The graph shows both the demise of Mt Gox and the negative effect that this had on Bitcoin’s price: the price was effected massively due to a loss of faith. From then on the price has been relatively stable. How do I protect myself from an exchange collapsing? The problem here is that you might lose your Bitcoins. Collapses are difficult to predict for those without a knowledge of the internal workings of the exchange. To minimise this risk you can do some research, asking experts for their opinions and most importantly withdrawing your Bitcoins to your personal wallet while you are not actively trading on the exchange.
July 2014
June 2014
May 2014
April 2014
March 2014
January 2014
December 2013
November 2013
October 2013
September 2013
0
February 2014
MT Gox
200
August 2013
Price ($ USD)
1000
Nevertheless this risk is not specific to Bitcoin. Collapses have happened with e-gold and other centralised entities, it has happened with fiat currencies and it will no doubt happen again in the future. The difference is that Bitcoin is decentralised so an exchange collapsing will not bring down Bitcoin - compared to a central bank. Will Bitcoin’s value flat line? There is no way of knowing. A better question is can the value flat line? The answer is absolutely. Because there is nothing backing the currency its value lies entirely in people’s belief that it has value. If people lose faith in it, Bitcoin loses its value. It is worth mentioning that fiat currencies nowadays are also based on faith but they have the advantage of being backed by a government in addition to this. World events can significantly alter the value of a fiat currency and cryptocurrencies are in the same boat. There have been cryptocurrencies that have failed. Most of them have gone down because of a 51% attack (for more information on this see page 29) and the lack of a community to improve, use and mine the cryptocurrency.
Redefining Currency | 21
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“Bitcoin is the most important invention in the history of the world since the Inter net� Ro g er Ve r Bi t coi n A n g e l I n v e s tor
The Process
How are new Bitcoins generated?
George, Will and Alex are Bitcoin miners. They use computer programs to connect to the Bitcoin peer-to-peer network; a connection to all other miners. They collect all the transactions of the past 10 minutes into a new “transaction block”, including Emily’s transaction to Bruce. Cryptographic Hashes The miner’s computers use cryptographic functions to process the transaction blocks into a string of data called a hash value. Each hash value has a fixed length and is unique to each block. Any change to the original data will result in a hugely different hash value; this makes it impossible to predict in advance thus making the protocol extremely secure and difficult to replicate in terms of computer power. The Bitcoin Equation To strengthen this protocol a combination of the previously generated hash value is used, the current transaction block and a “nonce”. Hash values would be relatively easy for our miners to calculate, however it is the addition of a variable known as a nonce which takes up our miners’ time and importantly secures the Bitcoin system from being manipulated. This equation is what creates the Blockchain.
Example of creating hashes The root of all evil
6d0a189 9 086a...
The root of all euil
486c6be 4 6dde...
The root of all veil
68db7ee 9 8392...
Hash Value
Elements of a transaction block
Nonce
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New Hash Value
The nonce when hashed must create several zeros... The root of all evil ???
0000 0000 0000 00...
Individual transaction blocks from the Blockchain
Hash Value
Nonce
New Hash Value
Nonce
...this is like finding a needle in a haystack
New Hash Value
Nonce
New Hash Value
Nonces are simply a series of random numbers which are added to the equation and are used to add difficulty to the process. Our miners must produce a hash value which contains a certain amount of zeroes at the beginning of it. They cannot know what nonce will produce this hash so must individually “mine”, a process of generating many different nonces, until a miner happens to make a nonce which is compatible. As more miners join the network, further zeroes are added to the required hash value, making it exponentially harder for miners to generate the right nonce. Reward Alex is the first miner to complete this difficult task and is rewarded 25 Bitcoins for his work. A new address is created in Alex’s wallet with a balance of his newly minted Bitcoins. This proof-of-work process allows Bitcoins to be created at a fixed rate in an extremely secure manner, preventing duplication of coins and double spending.
Transaction Confirmed Emily & Bruce’s Transaction
Deeper and deeper levels of protection in the Blockchain
As time goes on, Emily’s transaction to Bruce gets buried under more recent transactions. An ongoing “chain” of verified transactions is created, a publicly accessible ledger, called a Blockchain. To modify, or to hack, the details of their transactions the work completed by Alex would have to be redone. Moreover all the work completed by successive miners (the entire blockchain) would also have to be redone. The computer power required to achieve this is inconceivable at current technological standards.
Redefining Currency | 25
The Blockchain What are the functions of the Blockchain? The Blockchain is recorded and distributed by the miners and servers connected to the Bitcoin network. The data contained in the Blockchain details every transaction that has ever occurred between user’s addresses. Online services such as Blockchain.info and other online platforms allow the Blockchain to be viewed and analysed in a visual form.
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Blockchain.info, displayed in the image below, displays the transaction between Emily and Bruce featured earlier. It shows what address a transaction came from and what address it was sent to. The address on the left is Emily’s address, and the right Bruce’s address. The platform shows what IP address the transaction was initiated by, allowing for identification by location. Additionally there are features to view realtime transactions occurring on the Bitcoin network, and graphical tools to show the history of addresses particular coins have been assigned too.
Does the Blockchain make users anonymous? All transactional information is publicly available to anyone, however the random alphanumerical addresses provide a certain level of anonymity for both parties. On its own, an individual who doesn’t know either Emily’s or Bruce’s address would not be able to ascertain their identities. However if someone had previously traded with them, or had knowledge of their address, our Bitcoin partners’ past and future transaction history could be disclosed. For instance this would be a possibility if you posted your address on a message board or website, and if you had dealt with a merchant or exchange. These privacy concerns can be summarised in two ways: • Forward attacks identify you by getting your personal information and connecting it to your address. • Reverse attacks use your address to search for personal information associated with the address.
Studies have demonstrated that by analysing the Blockchain many transactions can be clustered together and recognised as going to specific entities, citing Silk Road and other popular Bitcoin websites. They conclude that it is possible for law enforcement agencies and merchants with access to less public information can connect more “real world identifiers” to Bitcoin addresses and transaction history than possible with traditional banking and credit card systems. What methods can be used to protect your identity? There are different methods which Bitcoin users can employ in-order to protect their identity. Primarily, as the official Bitcoin website recommends, is to create a new address for each transaction. These additional addresses can be created and managed in end-user client programs with ease. If the user does not publish personal information linked to the address they will remain unknown. However this is not always possible, especially when purchasing from an exchange where it is usually necessary to submit identification documents.
“Mixers are online services which enable many users to pool their Bitcoins together making many transactions between each other”
Visual analysis of a region of the Blockchain and particular Bitcoin addresses
If a user has coins connected to their identity, from an exchange or nefarious activities for example, they can take additional actions to obscure their identity.
Redefining Currency | 27
Mixers are online services which enable many users to pool their Bitcoins together making many transactions between each other. This is analogous to “cleaning” cash through traditional laundering. This process lasts several days and is usually automated costing a small fee of the total amount a user wishes to mix. In theory it is possible to work backwards through the Blockchain to find the original address (including the identity of the owner) before mixing but this become exponentially more time consuming and difficult task the longer a user mixers their Bitcoins for. There are new technological solutions being released in-order to increase users privacy. Dark wallet is a work in progress and provides users with anonymity through the use of proxy services and internal mixing between all other dark wallet users. Also new cryptocurrencies, such as Dark Coin, have been built on an edited version of Bitcoin’s protocol and implement mixing like services within the protocol itself. Making it impossible to identify a user in real life from their transactions and addresses through analysis of the Blockchain.
“High level international cybercriminals have not by-andlarge gravitated to peer-to-peer cryptocurrency, like Bitcoin”
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Can these methods be used to launder money? Laundering money through Bitcoin is not impossible, but nor is it particularly attractive in comparison to more traditional methods with fiat currency. Consider an organised criminal gang who sell illicit substances online for Bitcoin. They will go through the process of anonymising their internet connection, using mixing services and dark wallets all with the intention of hiding their identity. So far they have successfully avoided detection from their activities. So how do they now change their Bitcoins into their host country’s fiat currency? They could sell their Bitcoins cash-in-hand, but on large operations this would be difficult and risky. Going through most Exchanges it is necessary to submit identification so you can trade between currencies. This is again risky and authorities would become suspicious when multiple large payments were made into the gang member’s bank accounts - they would have to justify where the payments originated from, which obviously they cannot state the truth about. Potential ways around this could include the setting up of multiple fake bank accounts and committing fraudulent activity in order to maximise the amount of funds before a bank’s “triggers” were set off. There is also the possibility of fronting as a business accepting Bitcoin however given the low adoption currently this is not likely to be successful.
A diagram of the Blockchain branching A secret service agent stated “From my experience, high level international cybercriminals have not by-and-large gravitated to peer-to-peer cryptocurrency, like Bitcoin” Instead, due to the complexities of exchanging out of Bitcoin, criminals still prefer centralised fiat currency based on looser regulations and the fundamental untraceability of cash. How can the Blockchain be attacked? The Blockchain is vulnerable to computer attacks. This is because it relies on miners being “honest” in their contributions. In order to take over control of the Blockchain a person or group would have to posses a majority of the total mining power on the Bitcoin network. This is known as a 51% attack.
According to CoinGecko, a credible cryptocurrency journal, at the time of writing it would cost approximately $300 million to launch a such an attack using the current price of mining hardware. This is not an insurmountable amount of money and does highlight a big assumption of the Bitcoin network. The largest pool that currently exists is Ghash.io, having an estimated 40% of the processing power of the Bitcoin network at the beginning of 2014. Nevertheless, launching an attack would not be financially beneficial because all trust in Bitcoin as a payment system would be lost - the implications being it would become worthless. It would be illogical to invest so much into specialised equipment for it to become useless. Has the Blockchain branched before?
In such an attack, because majority is gained, a new “branch” of the Blockchain takes precedence because it is longer. A corrupt version of the Bitcoin software, which benefits the corrupt party in some way, would then be used allowing them to generate disproportionate wealth for themselves. Some academic papers say that this can be achieved with a lower percentage of the total processing power, however the probability of the attack being successful becomes exponentially lower.
A few hours in March 2013 is the only time the Blockchain has ever branched. A miner running a newer version of the software created a large enough block to branch the chain. It was too large a block for the previous versions of the software and so was not accepted as valid. Those miners running the newer version however, did accept the large block and the two groups diverted from each other, creating two separate ledgers with different transactions in them.
“It would cost approximately $300 million to launch a 51% attack using the current price of mining hardware”
Within a few hours the issue was resolved by the development team recommending a downgrade to the older of the two versions of the software and eventually network consensus was reached. During those hours Mt Gox suspended trading to avoid the same Bitcoins being spent twice. Redefining Currency | 29
Who controls Bitcoin? Since Bitcoin is a cryptocurrency, it exists in the form of computer code so you would expect whoever has control of this code has control of Bitcoin. However this is not the case because the control and development of Bitcoin is open-source, meaning that anyone can make changes as long as those they are supported by a majority. Most developers in this area are now members of the Bitcoin Foundation. This group control the most popular development process. This is how the process operates: 1. Developers work on potential fixes or improvements on their own or in groups. 2. Once they think their update is ready they have to ask the developer community for approval. 3. If the change is a simple quick fix or non-controversial then another development team member approves it. 4. Github is used to host new, stable and official versions of the Bitcoin software for users to download.
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If it is more complicated development then a discussion on Github (the website used for Bitcoin development) must be opened. Developers then have to get a broad consensus across the entire network for the change to be implemented. To a certain extent the system relies on developers having Bitcoin and its users in their best interests. This means that if a corrupt developer proposes changes, they will not be accepted by the other developers and they will lose credibility. The developers are also accountable to all users of Bitcoin - its community. This is because if a change was to be approved by the development community that the majority of users did not support then they could refuse to download the new version of the Bitcoin code. The effect of this would be that the code would remain unchanged because the longest blockchain would be the one running the previous version of Bitcoin. The people truly are in power. It is worth noting two things: firstly that developers of Bitcoin will likely fall into the category of users as well and secondly that this gives more power to the users than the developers or miners, because they outnumber them. There’s power in numbers.
Who is in control the Bitcoin Foundation? Gavin Andresen is Chief Scientist of the Bitcoin Foundation, an organisation committed to championing the use of Bitcoin and funding its development. Andresen is also the lead developer for the Bitcoin digital currency project, meaning that his word does have some influence within the Bitcoin developer community. He is akin to a constitutional monarch, who has the ‘Royal Prerogative’; they can declare war and have other various powers which can be exercised but never are in practice. In the same way, Andresen can and does develop code for Bitcoin but has to go through the same process as everyone else. The difference is that because he is a trusted member of the community he could probably assert himself to push specific changes through but he would generally not because he is still very much subject to the view of the crowd.
Gavin Andresen Founder of the Bitcoin Foundation
Redefining Currency | 31
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“It will be everywhere, and the world will have to re-adjust. World gover nments will have to re-adjust� J o hn Mc A f e e f o unde r o f M c A f e e In c .
The Economy
“Bitcoin is a very exciting development, it might lead to “ Bitcoin is the beginning of a world currency. I think over something great: a currency without the next decade it will grow to a gover nment, something necessary become one of the most important and imperative. ” ways to pay for things and transfer N as s i m Ta l e bassets” , sc h o l ar a n d sta ti sti c i a n Kim Dotcom C E O o f M e g a Up lo a d
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Bitcoin and Banks Bitcoin is not backed by anything, unlike many of the world’s currencies today. The majority of currencies in use today are ‘fiat’ currencies, meaning they are backed and regulated by a government or political body. This is an evolution of currencies being backed by a physical item (the Gold Standard), usually precious metals, which has over time been abandoned. This means that Bitcoin is completely decentralised, having no borders or regulatory bodies.
“There are 3 eras of currency: commodity based, politically based, and now, math based” Chris Dixon, Technology Investor
Bitcoin’s political agenda is open to debate: some would argue that as an open-source currency it does not have an agenda since it is controlled by no one individual or entity. The software is completely open-source and so is able to be changed and edited by anybody, providing a peer consensus is reached. Others would say that it has strong political ideals because it was born of the Cypherpunks movement. It is true that the idea for Bitcoin was conceived on the original Cypherpunks mailing list and that the ‘Bitcoin Foundation’ endorse the use of cryptocurrencies. These can be considered political agendas but they are not Bitcoin’s.
“Bitcoin is completely decentralised, having no borders or regulatory bodies” The IRS considers Bitcoin property rather than currency and is subject to the same tax laws (capital gains). The same is true for the UK. However Germany is different and considers it a “unit of account.” Up until November 2013 a company called Casascius manufactured physical Bitcoin coins, but since have stopped production. These were analogous to a token that could be redeemed for Bitcoins rather than an actual bitcoin. They were perceived as more of a novelty product, given the cryptocurrency’s attributes of being virtual with no requirement to be physical in-order to be used.
Redefining Currency | 35
How do consumers use banks? The majority of the time the consumer uses a bank to store and to borrow money. The reason that we store money at the bank is to pass the risk of holding money on. We trust them to look after the money and to return it to us on request. Banks use the money stored by customers to lend to other consumers and engage in financial activities which include loans, mortgage and investments. In return for borrowing the consumers’ money the bank pays a small amount of interest. The loans are given out to consumers and businesses. This, known as fractional reserve banking, is what would crucially be lost in the transition from fiat currencies to cryptocurrencies. Loans are a crucial part of the fractional reserve model and are essential for the financial system because people need credit to buy capital goods e.g. houses, machinery, equipment etc. They help ease the problem of cash flow. People often have the money to buy the goods that they want but not at the time when they wish to purchase them. So they take out a loan to cover this gap. They pay in monthly repayments and the bank charges a interest on the loan. To fill the gap left by the banks if Bitcoin were to become ubiquitous individuals might set up private equity companies that provide loan services. The problem with this would be that they would have to physically have enough Bitcoins in their account to lend out to consumers.
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This would mean either very small loans (which defeats the purpose of getting a loan for a capital good) or very few clients (meaning it would be available to the highest bidder). This makes it completely unfeasible. An alternative to this is an exchange where individuals would put their spare capital up for sale in the form of a loan, like an eBay for loans, called Peer to Peer loans, such as Zopa. This again may not be feasible but would be adequate to meet the needs of bitcoin loans on a small scale. This solves the problem posed by the lack of bank loans because the large-scale capital comes from many individuals.
“To fill the gap left by the lack of banks in the Bitcoin world individuals might set up private equity companies that provide loan services� Under the assumption that Bitcoin operates on a peer-to-peer basis and that banks could accept and loan out Bitcoins, an examination of the banking system reveals that it would not be feasible on the same scale that banks currently operate on today using fiat currencies. Fractional reserve banking works by banks lending out more money than customers deposit. The reason that this works is that the bank is covered to a certain extent by other deposits coming in, i.e. the money circulates around the community, merely passing through the bank.
The banks are also covered by the central bank, who can lend them money to protect against customers withdrawing all their deposits at once. The central bank can creates money out of nothing: in their balance sheet they record it as an asset (Bank A owes us £X million) and a deficit (we paid £X million to Bank A), totalling zero. The advantage of using this approach is that it creates money in the economy and promotes growth by actively circulating the money supply.
“There is a finite amount of gold, just as there will only ever be 21 million bitcoins” This is where Bitcoin runs into a problem. To have some idea of what might happen in this situation we can look to the past at a time where gold was a currency. There is a finite amount of gold, just as there will only ever be 21 million bitcoins. The situation that the central banks ran into was that there was simply not enough gold to accommodate the activity in the economy, and they had to issue notes that were given value by the promise of the government. These had the advantage of being of unlimited supply, because more could be printed, resulting in inflation. This has resulted in the banking system that we have today.
Bitcoin has no central bank and hence some banks would fail and collapse. If Bitcoin were to be used in the fractional reserve banking system, we would eventually come full circle and end up with the same problem that gold had. This, however, is avoided by how Bitcoin operates; the peer-to-peer network. This ensures that banks are cut out of the system completely, meaning the problem will not arise. However, it also implies that Bitcoin will never be a viable alternative to current fiat monetary systems. How is Bitcoin being regulated? Some banks around the world are refusing to accept deposits and turning business away from bitcoin-related activities and companies. This is after the Isle of Man Government has given their endorsement of Cryptocurrencies. The distinction to make is that banks are refusing business rather than the government or central banks introducing bans. Regulatory bodies like the FSC have the power to block Bitcoin activity but most are out of the picture because it is currently an unregulated activity in many places.
Redefining Currency | 37
Bitcoin’s money supply Bitcoin’s money supply is controlled by a protocol which ensures that there will always be a finite amount of Bitcoins ever created. The amount is capped at 21 million and up to now miners have churned out 13 million Bitcoins, which is just over halfway of the total amount. Additionally the protocol controls the rate of the production; a rate which will slow down (as the difficulty of the network increases) and will eventually stop. By its very nature Bitcoin therefore experiences deflation. The last “entire” Bitcoins are predicted to be mined around 2024, so what happens after this? The protocol is setup to award miners with smaller denominations of bitcoin up until the year of 2140 and transaction fees for their work. The protocol reflects commodities such as gold which is physically mined and is based on the principle of a finite resource possessing more value as its rarity increases over time. Like fiat currencies, such as sterling pounds, there are smaller units of measurement that one can use. For example, a pound (£1.00) and a penny (£0.01). A single Bitcoin is currently dividable to 8 decimal places, the smallest being a Satoshi (0.00000001 bitcoin).
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The creator of Bitcoin implemented the ability to create greater divisions, allowing for even smaller units to be used in the future. This will be an important feature if Bitcoin was to become a successful worldwide currency. Political and technological commentary given by pundits all too often juxtapositions Bitcoin (and generally any cyptocurrency) and traditional fiat currency as in stark opposition and conflict with one and another. A more feasible and moderate view of the future sees both forms of currency co-existing as mutual optimisations of each other. Bitcoin does not have to replace fiat currency and conversely fiat doesn’t need Bitcoin to fail or be harshly reprimanded by regulation in order to ensure continued usage of sovereign currency. By integrating cyptocurrency protocols with traditional currencies a more valuable hybrid economy can exist that will benefit from a stronger, safer and less expensive monetary system. In this digital age, the sending of money remains excessively expensive, slow and insecure. The paths that payments are processed through impose fees for using their banking services. The slow network systems controlling these processes are older than the internet itself, dating back to the 1970s! Universal credit card networks charge even more for their services, in addition to the previously outlined fees.
So what are these fees used for?
Merchants and businesses can decrease their overheads from transaction fees and these savings can be passed on to customers, acting as an incentive to use Bitcoin in favour of fiat currencies. In reference to security, current payment systems used by merchants are vulnerable. Stored customers’ personal information can be at risk and used fraudulently by hackers if breached. Bitcoin’s transaction process provides no useful information that hackers can steal, reducing a growing threat for both customers and merchants alike.
Mostly they reimburse victims of fraudulent activities such as identity theft and generate profits for the companies. Bitcoin removes the requirement for these charges, in part due to its non-reversible transactions. To illustrate the expense of the traditional methods to send £1,000 to a merchant requiring the equivalent in euros it would cost roughly £35 via credit card and as much as £40 via bank transfer. The same payment through a Bitcoin exchange would cost £15 on average, however this would be practically nothing if the banking infrastructure could be removed. This is currently required for transferring fiat funds to Bitcoins.
Total Number of Bitcoins Over Time 21
15
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3
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2021
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0 2009
The payment advantages of Bitcoin are simple; more money reaches its destination faster, safer and with increased privacy. You are ultimately given greater control over your money.
18 Total Number of Bitcoins (Millions)
“The payment advantages of Bitcoin are simple; more money reaches its destination faster, safer and with increased privacy”
Year
Redefining Currency | 39
To retain balance it is important to explain popular criticisms of Bitcoin. Central bank representatives believe the cyptocurrency to be a fad citing its fluctuating value as a critical flaw that makes in ineffective as a form of money. This reasoning has some credibility, but considering Bitcoin is still an in its infancy it is not surprising. As adoption grows its value will change as the market collectively perceives its value against its achievements and drawbacks. Bitcoin transactions continue to grow rapidly as adoption increases however it is still miniscule in comparison to traditional payment networks which maintain significant roles. It appears to be clear what the future holds if innovation is allowed to run its course. Core services of banks can be facilitated more cheaply and efficiently with Bitcoin and other cyptocurrencies. This suggests that if banking and financial mediators remain complacent they are at risk of losing their market share. However this evolution in finance should not be viewed negatively by these intuitions, for it is only a short-term threat and they stand to gain far more in the long-term through new business opportunities. There is untapped value which exists as innovations above the Bitcoin network; much more can be achieved through the Blockchain ledger and its protocol than just transferring numbers.
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It is speculated that the traditional model of charging fees will move to one of the value-added layers on top of the Bitcoin network. Future services will incorporate “smart” properties, allowing the assigning of value for any physical and non-physical asset by allowing additional properties to be assigned to a specific bitcoin (for more information see “Smart Contracts” on page 56). Presently, banks and large companies are apprehensive about the security and stability of Bitcoin. This is preventing a broader set of customers from adopting it and stopping Bitcoin skyrocketing into the mainstream.
“The traditional financial system is being challenged to step up their game in terms of efficiency because the bitcoin environment is removing middlemen” How will cyptocurrencies be optimised? Currently we are at an early transitional period, obviously fiat currency is still essential in enabling payments to merchants who don’t accept Bitcoin. Fiat currencies are stable and retain their value consistently, though merchants and businesses may not be aware they provide a solution for the payment of goods rather than speculative investment.
On the other hand, Bitcoin trades at low volumes through relatively small exchanges, similar to small-cap stock, so naturally it is volatile in value. This should improve over time as Bitcoin grows and is circulated around more users. Merchants can avoid volatility on a day-to-day basis by trading out of Bitcoin into fiat. Business payment services also protect their clients from volatility if they trade back into their fiat currency at the end of their trading period. What about taxation? Fiat currency is used for taxation which supports and funds the public sector, including taxation on earnings related to Bitcoin. Gateways into fiat currency offer a simple method of applying tax at Bitcoin exchanges instead of attaching editions to the protocol itself. Governments remain cautious about passing definitive legislation for cyptocurrencies due to a lack of understanding and fear about missing out on tax revenue. Additionally, it is natural for legislative issues to be behind innovations in technology and there is a large chance by the time legislation is passed it would already be inapplicable to the developments which would take place in the meantime. What about counterparty risk? With traditional banking and financial institutions a high amount of trust is required amongst parties in completing a transaction. In order to protect the consumer many laws and regulations have been constructed.
There have been famous cases where businesses have breached this trust and regulations have aided consumers in fraudulent charges and as a lender of last resort. Bitcoin removes this model of trust at least at a protocol level. This is because the transaction process is non-reversible and depends on its cryptographic proof, not the accountability of parties. Nevertheless trust in Bitcoin is not all together absent. For instance, whether it’s trust in the open development of the core code, services and software to manage wallets or exchange services to protect the fiat gateways and personal information – with the exception of the transaction process- some trust in strangers is needed in Bitcoin. The loss or theft of Bitcoins is comparable to the loss of cash, by default the protocol prevents double-spending and thus fraudulent charges are not possible. Bitcoin’s features of identity protection, decentralised transactions and a public ledger create an extremely secure transaction system. Traditional institutions will still have a role to play as trustworthy partners for exchanges and other services providers. Software developers will reduce the requirement for trust with the implementation of Bitcoin-esque protocols for other kinds of asset storage. This is not a simple matter of “Bitcoin vs traditional banks”, but one of who to trust, for what purpose and for what amount – context being key for different circumstances.
Redefining Currency | 41
“Money is a collective agreement. If enough people come to the same agreement, what they agree upon becomes secondary, whether it be farm animals, gold, diamonds, paper, or simply a code. History proves all these cases to be true. Who knows what the future is going suggest to us as money, once we see digital currencies as ordinary?� S.E. Sever Wr i t er
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How will a hybrid economy - fiat and cryptocurrency - function? Complicated developments in the financial sector will be necessary to reach an ideal point whereby customers and merchants are able to get into and out of cryptocurrencies quickly, easily and securely. Early versions of these systems are beginning to emerge in the form of services like Ripple. For illustration, customers want to acquire Bitcoins using their host country’s fiat currency instantly, and then execute a payment immediately. Shortly after the merchants want to acquire fiat currency in exchange for those Bitcoins. A “gateway” would enable this scenario however it would have to overcome several challenging elements. For mainstream users it must not operate using a trading desk or order book system (using manual bidding and asking prices). Instead it must be automated process that transitions seamlessly. However there will be some short-term credit risks in order to complete this process as outlined. Bitcoins credited customers instantly can be used and never recovered, while the credit card payments used to acquire the Bitcoins can be reversed – giving a window of opportunity for frauds.
The gateway as an infrastructure if it holds fiat would effectively be a bank, given the copious amounts of regulations it would have to follow. If it simply transferred fiat currency and did not hold funds then the gateway would have to partner with a bank. Partnering with a bank is no easy feat. Transacting Bitcoin from one address to another, for whatever purposes, cannot always enforce Know Your Customer or Anti-Money Laundering regulations. Most banking entities are not comfortable with this and are currently hindering gateway innovation significantly. A mainstream gateway would deal with the risks of short-term credit fraud probably by individually regulating clients, simplify the transition of fiat to cryptocurrencies, optimise gateway fees and also satisfy the requests of their partner bank – all while increasing the speed of current exchange and transaction processes. This will be challenging system to build and organise, however the potential rewards are huge.
Redefining Currency | 43
Speculation, inflation and deflation What influences the price of Bitcoin? The main factor that accounts for price fluctuations in Bitcoin are events that occur in the Bitcoin world, community and ecosystem. A good example of this is the fork in the blockchain that occurred in March of 2013. When a miner running a newer version of the Bitcoin software created a large enough block, the blockchain branched and two different lists of transactions were created. In response to this Mt. Gox halted transactions and the price of Bitcoin fell by 23% (v USD). Again looking at Mt. Gox, we can see that during its life-span from the beginning of 2012 to the start of 2014 Bitcoin’s price rose from around $5 to a high of more than $1000. Speculation and popularity fuelled this massive appreciation: because the currency became so much more popular under the activity of Mt. Gox, people believed it to be worth more. During Mt. Gox’s collapse the price fell to around $200, another showcase of speculation setting the price. Other examples of this include some Chinese banks banning Bitcoin.
“Mt. Gox halted transactions and the price of Bitcoin fell by 23%” What is a Whale? A whale is a party that owns a large number of Bitcoins; so many that they have the potential to significantly manipulate the market if they so want by selling large amounts of Bitcoin at a certain price.
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It does not need to be explained that this is a problem for the currency because it takes power away from the natural market forces that usually determine a currency’s price. Why is this a problem for Bitcoin? The reason is that it is far easier to be a Bitcoin whale than a whale in a widespread fiat currency. This is due to the fact that some miners who started mining immediately when mining was made available accumulated vast quantities of Bitcoins. Now that the price of Bitcoin has skyrocketed and there is much greater interest, these miners have a lot of power within the market. There are several other ways whales can exist but they all revolve around obtaining large amounts of the currency at its inception.
“Now that the price of Bitcoin has skyrocketed and there is much greater interest, these miners have a lot of power within the market” Is this a problem for other cryptocurrencies? It depends on the currency. For most, whales do exist in one form or another. In some cases large amounts of a currency are mined by the creators before the software is released to the public, making them a whale. This is called pre-mining and in some cases is an inherent feature of the currency and is designed to be used in a positive way. The most notable example of this is Ripple Labs owning the vast majority of all XRP in existence.
Inflation and Deflation Inflation is when the overall price of all goods and services in an economy (called the price level) increases. Deflation is when the price level decreases. This should not be confused with disinflation, where the rate of inflation decreases but is still positive. In the context of a currency, inflation means that each unit of the currency will be worth less than before (if the price of a loaf of bread increases from $1 to $2, each dollar will now only buy you half a loaf where before you could get a whole loaf-each unit is worth less) and deflation means each unit is worth more.
“The main argument against having a deflationary currency is that people won’t spend it because it will be worth more in the future, so they save”
As a counterpoint, this argument is really not relatable to Bitcoin at the moment because of its volatility. Inflation and deflation are long-term attributes and Bitcoin has not had a long enough stable life-span to make a judgement on the inflation rate and whether its impact has been positive or negative. Inevitably there are those within the Bitcoin community (even within the Bitcoin Foundation) who think that the deflationary nature of Bitcoin is a strength and those who say it is a weakness. It will take a retrospective look in some years’ time to get some answers and even then those answers will likely not be simple ones.
Bitcoin is inherently deflationary. This is because the supply of Bitcoins is capped. This is of course assuming that demand for Bitcoin rises as more people become aware of it and believe it has value. However, by gradually increasing the money supply using the mining process, this deflation is dampened. The main argument against having a deflationary currency is that people won’t spend it because it will be worth more in the future, so they save. Japan has been caught in deflationary spirals in the past where this effect compounds and makes itself worse.
Redefining Currency | 45
“I understand the political ramifications of [Bitcoin] and I think that gover nment should stay out of them and they should be perfectly legal� Ro n P a u l Repub l ic a n Te xa s Con gre ssma n a n d f orme r candi d a t e f o r US Pre si de n t
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Bitcoin for business How is Bitcoin helpful for business? Bitcoin can bring many benefits to the business through the technology which is core to Bitcoin, the Block chain. Companies can use they block chain to make their payment systems more secure, cheaper and faster. Transactions with Bitcoin Bitcoin’s high security allows it to process transactions in a quick and cheap way. You can make and receive payments using the Bitcoin network with almost no fees. The only real expenses are electricity and the initial cost of the computers required to receive the coins. Fees are not required in the transaction process. Are businesses protected against fraud? There is no way to completely get rid of fraud in the payment process but Bitcoin comes close. Bitcoin payments are irreversible and secure, meaning chargeback frauds (When payments are reversed after the transaction of the good or service has taken place) cannot occur. This is not the case if a company accepts credit cards or PayPal where It is estimated that $1 billion is lost in charge-back fraud each year. Bitcoin and the blockchain would reduce this, putting less pressure on merchants and saving them money. How fast are payments? Payments are fast. According to the Bitcoin Foundation, Bitcoins can be transferred from globally in 10 minutes. This is the result of Bitcoins never having any physical location. It is possible to transfer as many of them anywhere with no limits, delays, or excessive fees.
There are no intermediate banks to make you wait three business days. This is a great benefit for businesses which allows them to process payments faster than ever before. Consider a company where their business runs on buying products in bulk and paying for them later. The company would bring the lead time on their payments down, increasing their working capital cycle. Multi-signatures Bitcoin has a feature where transactions can be made to be multi-signature. This means that in order for the transaction to take place it has to be approved by more than one private key. The implication of this is that businesses can have greater security by saying that (for example) 3 out of 4 staff members in a company have to approve a payment before the business pays out. This means that the majority of staff are agreeing that a payment is due but they can still send out payments if one employee is sick and that no one individual can compromise the company’s wallet. This is called the “m-of-n” model, because you need m keys out of a possible n to approve the transaction. This is also useful for individuals: if an individual needs 2 out of their 3 keys to sign then they can have three keys on separate devices. A hacker then needs two keys to access your Bitcoins and if one key is lost then the other two can be used to recover the Bitcoins. Services like BitGo make this process easier by holding a key on their server, having one on the client’s mobile and recommending one kept in cold storage as a backup. Redefining Currency | 47
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“Over time I think that digital currencies will be a major contributor to the Island� P et er G re e n h il l D i recto r o f e - B u sin e ss Is l e o f M a n G o v e r n me n t D epar t m e n t o f E c o n omi c D e ve l opme n t
Isle of Bitcoin
“Economists a nd jour nalists often get caught up in this question: Why does Bitcoin have value? And the answer is very easy. Because it is useful and scarce” E r i c Vo o rh e e s co-f o u n d e r o f t h e Bi tc oi n c ompa n y C oi n a pu l t
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Isle of Man and Bitcoin On the face of it the Isle of Man would seem like the perfect place to create your new Bitcoin-friendly business. Indeed there are many reasons why this is a valid opinion: the Government has a liberal, Bitcoin-friendly stance, corporate tax is low, and good bandwidth speed and excellent technical infrastructure exist thanks to the e-gaming industry.
“There are few high-tier banks on the island as it is and the number of those that will offer you and your Bitcoin business an account is zero” The government’s attitude in particular is what many journalists writing on the subject have picked up on with quotations such as “Our stance is intended to welcome those who can meet the necessary standards while also preserving the Island’s good reputation as a financial centre”, from director of e-Business Development, Peter Green. However, a problem arises in the form of banking. Like it or not, a new business will need to have some link to the banking system.
To fully make the transition to operating only in Bitcoin is completely unrealistic, mainly because it is highly likely that employees will want to be paid in Sterling. This means that the company will need a bank account, which itself is nigh on impossible to come by if you deal with Bitcoin. There are few high-tier banks on the island as it is and the number of those that will offer you and your Bitcoin business an account is zero.
“Like it or not, a new business will need to have some link to the banking system” As far as the future goes, currently the Isle of Man does stand king as the prime location for new Bitcoin-friendly startups. The reason for this is that the attitude in the banking world to Bitcoin is quite similar the world over but the Isle of Man Government has a far more positive and healthy attitude (from the point of view of the business) towards it than the vast majority of world governments. Looking at the other end of the scale, Russia has said that Bitcoin is illegal and Chinese central banks have ruled out all Bitcoin activity.
Redefining Currency | 51
Interview with Charlie Woolnough What follows is a conversation with CoinCorner CEO and MDCA Chairman, Charlie Woolnough. He was kind enough to answer some of the questions we had about Bitcoin, CoinCorner and the Isle of Man as an environment for Bitcoin activity.
Charlie Woolnough CEO of CoinCorner Chairman of MDCA
Did you have any challenges regarding regulation when creating CoinCorner and if there were any how did you overcome them? We aren’t regulated yet - we have built our exchange with procedures in place (KYC/AML etc.) so that when a regulatory framework is in place in the Isle of Man, we will be compliant. So, in answer to your question, we encountered no regulatory difficulties because our exchange is not yet a regulated activity. Our major issue at the moment is finding stable banking relationships. Capital [International Group] currently helps us in this regard.
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”Our major issue at the moment is finding stable banking relationships” How involved has the MDCA (Manx Digital Currency Association) been in the creation and support of CoinCorner? The MDCA had no involvement in CoinCorner - the only connection is the fact that I am chairman of the MDCA and CEO of CoinCorner. In fact, CoinCorner was developed as a concept before the MDCA was created. However, it would be remiss of me not to mention that being chairman of the MDCA does perhaps afford CoinCorner additional credibility. It is difficult to quantify this exactly though. Also, the MDCA is a useful lobbying group for regulatory change that could benefit CoinCorner. How successful do you think the Manx adoption of Bitcoin will be and what role will CoinCorner play in this? Manx adoption of Bitcoin - it could potentially be very successful (in a similar way e-Gaming is) if there is intelligent regulation and we move swiftly. There is currently a window of opportunity but it won’t last long. Other domiciles are pushing hard to develop Bitcoin sectors for their economies. New York has just declared that it will be creating a regulatory framework for example. The winner will be the jurisdiction that is able to provide stable banking relationships - this is the sector’s biggest issue right now.
CoinCorner’s role? We are the first Isle of Man based exchange and we have some incredibly strong in-house expertise. We also have other crypto-based business ideas that could eclipse the exchange. So, we have potential to help put IoM firmly on the map as the domicile of choice for crypto businesses. I suspect we will need an institutional partner at some stage to take us to the next level. In addition to this, I get roughly two calls a day from crypto-related business asking my advice/thoughts on locating in the Isle of Man.
“So, we have potential to help put IoM firmly on the map as the domicile of choice for crypto businesses” What are your views on the future of Bitcoin and other cryptocurrencies and how do you think they will change the financial landscape? Do you think that cryptocurrencies will provide a substitute to traditional fiat currencies or sit alongside them as an addition to the current economic world? I foresee a future where crypto currency becomes more mainstream; the benefits are just too compelling to ignore. Whether it will be Bitcoin or another cryptocurrency is hard to say. However, even the biggest critics of Bitcoin tend to agree that the blockchain technology (the public ledger and peer to peer payments) is a great advancement.
I actually think the biggest beneficiaries will be third world or emerging nations that currently suffer from a lack of access to banks. With crypto currency people potential don’t need bank accounts. That said, at least in the short to medium term, crypto won’t replace fiat. They will operated in parallel - perhaps with crypto become more and more popular for certain transactions (internet, international payments, micropayments, programmable contractual payments etc). The biggest losers will be the Western Union etc and Credit Card companies (Visa, Mastercard). The winners will be those who establish brand name exchanges, payment gateways and secure wallet business in the crypto sector, as well as those who find innovative uses for the technology or find social crossovers into Facebook etc. Looking further afield I can envisage all money becoming crypto based. That is to say that countries will phase out physical currency and issue their own digital money (the Isle of Man could be first). I can also see banks owning exchanges and exchanges merging with crypto payment gateways (or building their own like CoinCorner is perhaps planning). One thing is for sure, the banking industry as we know it is going to change. If any group can successfully blend both banking and crypto it would be a powerful offering. Having a crypto account sat along side your fiat account to use for certain transactions would be very useful. However, there are several barriers that need to be overcome before crypto becomes more mainstream. Redefining Currency | 53
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“The next step in human evolution would be a race that could put their trust in each other, not in their rulers or politicians� S.E. Sever Writer
The Future
Smart Contracts The probable developments of Bitcoin and its underlying technology were briefly touched on in the depiction of a fiat and cyptocurrency “hybrid economy”. It was predicted that the traditional model of charging fees in the financial industry would become obsolete due to the all advantages of Bitcoin’s protocol. There are emerging innovations which utilise the protocol in new ways, principally the formation of contracts, and it presents opportunities to the current financial institutions (and others), transforming their fundamental model to one of value-added. Smart Contracts The transactions operating on the Bitcoin network and Blockchain ledger are predominantly used for the embodiment of money, a type of asset, yet at a protocol level this is only the transferring of numbers. Numbers are flexible, the Bitcoin infrastructure too, and because of its founders’ foresight the system can be natively adapted to create ownership and contracts of smart digital property; from which any asset, physical or intangible, can be represented and controlled on the Blockchain. The modus operandi of Bitcoin guarantees a system that is not reliant on trust but one of cryptography and thus automation.
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The creation of contracts with minimised trust and hence reduced risk brings with it a whole manner of advantages. It effectively removes the need for judgement; the control and trust managed by humans becomes obsolete in favour of automation. The removal of this element will reduce fraud, mediation fees and also enable types of trade that would never otherwise be possible. Making property “smart” empowers it to be traded with vastly less trust.
“It effectively removes the need for judgement; the control and trust managed by humans becomes obsolete in favour of automation” Asset Ownership So what exactly is smart property? If you own a car it is likely to possess an immobiliser which is a simple type of smart property. The key of the car uses cryptographic technology unique to each car, meaning only the holders of the correct key can activate the car. This innovation has prevented the theft of many cars because they cannot be started through hot-wiring. However the cryptographic technology featured here is not easily transferred or changed; it is kept in a physical key and car. With the innovation of Bitcoin’s cryptographic protocol, smart property will enter a whole new level of functionality.
Continuing on from the example of the use of cryptography currently used in cars, how would a smart property car operate? A “smart” car would be given a unique digital certificate from its manufacturer which contains data about its existence, age and mileage etc. This certificate would be cryptographically secured and can be used as proof for a variety of elements, such as those outlined, to relevant third parties. The car’s computer would be assigned an address which consists of an ownership and identification key, akin to private and public keys in Bitcoin currency transactions. These have a number of functions, for instance they prove the identity of the car’s owner allowing only them to turn the car on and also trade the car securely.
“the Bitcoin network can also enable the lending of low-risk loans with the implementation of another layer of security, collateral” In a scenario where the owner wants to sell their car this is validated using the keys and ownership can be transferred to the buyer from the seller using complex cryptographic scripts. The car’s computer checks the transaction against the Blockchain, the chain is now longer due to new transactions, so is confirmed. In practice these processes will be seamlessly completed with mobile phones and NFC (near field communication) technology.
Users wouldn’t be aware of the complex cryptography going on in the background, the procedures of transferring ownership and more would simply be managed by a client app and would be as simple as tapping the mobile on the car’s dashboard and between the buyers and sellers mobiles to finish the deal. What’s more this type of digital ownership is recorded onto the Blockchain and would detail the entire history of the car, or any asset for that matter. This is just one example of the types of transactions and digital ownership the technology of Bitcoin can make possible. Loans and Collateral Being able to trade assets, like cars, without the risk of fraud is a valuable function. However the Bitcoin network can also enable the lending of low-risk loans with the implementation of another layer of security, collateral. For example, the car owner has started a new business and needs a loan to fund it. They decide to use their car as collateral, a form of assurance, against the loan meaning they will lose the car if they cannot repay their debt. They could go to a bank, but instead envision a marketplace whereby people can bid on others debt. Such a place would make lending over the internet possible; lending would become more competitive and result in cheaper credit for borrowers.
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“I see Bitcoin as one of the biggest things for potentially reducing the power of state and uplifting the power of the individual to happen for… forever maybe” Zander Marz Author of “Beyond the Government Haunted World”
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Our business owner secures a loan from a lender with a reasonable rate. Next a script is configured to control the agreed variables of the contract; such as the loan rate and repayment period. The script combined with complex cryptography remove the trust required between parties. Before the loan is issued, access keys are added to the ownership key of the car. During the loan period, the borrower retains the new access key so they can use the car and but also transfer ownership to the lender. The script is importantly configured to automatically return ownership to the borrower once they repay their debt. If they do not repay their debt then the access key expires at the end of the repayment period, removing the borrower’s access to the car – it simply will not start. The lender can collect their collateral either by picking the car up or selling it, if for example they live in a different country. Again this entire process would be completed through simple, enduser applications.
“If they do not repay their debt then the access key expires at the end of the repayment period, removing the borrower’s access to the car – it simply will not start” Latest Scripts The Bitcoin protocol also has the ability to function as a mediator, assurance contract, bookmaker, stock trader and even a solicitor. Scripts are extremely flexible and provide numerous methods of resolving common problems in contracts and transactions, which are applicable in many service related industries.
It is conceivable that an entirely new industry will be born from the technology and the digital contracts and assets it enables. Furthermore, one can create their own contracts with the technology. For example, a mother can set up a contract to give her son inheritance when he turns 18, further variables can be included to give the payment before then if the prematurely for example – the contract is autonomous and executed without any human input. Ripple’s chief operator, Greg Kidd, perceives smart contracts as a more efficient system for legal purposes and predicts they will replace much of the “antiquated” legal services in place currently. He stated, “Right now, if anything goes wrong with a contract, you have to go to a legal system, which is extremely slow and expensive”, the impending smart contracts will make companies and individuals alike experience a more efficient and inexpensive system, this could be a major development in the infrastructure of our society. Smart contract systems protocols in development include Ripple, coloured coins and Ethereum. These projects have limited functionality, however it is early days for the technology and the momentous rise of Bitcoin as a currency demonstrates how rapidly technological innovations can assimilate into societies. Smart property and contracts have the potential to revolutionise how contracts are managed and control ownership of assets - just as Bitcoin is changing concepts of money and value exchange.
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“This is what we’ve been waiting for, this is the cyberchryst moment. This is when the activists that have been pushing against the FED are going to win” Max Keiser Journalist
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What is Ripple? Fundamentally, Ripple is a payment network. It works in a similar way to the Bitcoin network in that nodes are required to provide links between the two parties participating in the trade. However, Ripple is trust-based. This means that as a node you have to approve other nodes that you trust. Ripple will find a pathway through these links of trust between nodes from one party to the other, even if neither party trusts the other’s node directly. Conversely, Bitcoin is a system where the transactions are all recorded in the public ledger which the whole network revolves around and trusts. This is referred to as a ‘mint-based’ system. Another feature of Ripple is that is has the ability to accept and output any world currency in a transfer. This is through the use of a native currency, also called Ripple or XRP (XRP will be used here to avoid confusion). XRP has no value outside of the Ripple network: you cannot use it to buy anything except other currencies on Ripple. The main reason why this currency is useful is for a medium to convert between currencies during payments.
“Ripple is a payment network. It works in a similar way to the Bitcoin network” Ripple is flexible in the way that it processes transactions. If it can it will trade directly between two parties - this is when XRP comes into play. If XRP is being used as payment then the two nodes interact directly to instantly complete the transaction. However, if a situation arises where a currency conversion is needed then Ripple operates via gateways. A user sends money in the currency of their choosing to their gateway which credits them with the relevant amount. The user can then send money to anyone on the Ripple network with an output of any currency: for example, I can send £80 to my American friend, who will receive the converted $100. This is where the trust model comes into play: a user trusts a gateway, which trusts other gateways, which in turn have their users trusting them. This network is Ripple’s standout feature that gives it many possibilities for the future.
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Barriers to adoption Commodity Properties Bitcoin still very much has a dual personality: for some it is a currency. However these people are in the minority. For most, Bitcoin is a commodity or an investment; and as in any investment market there have been winners and losers. Some of those who mined early on have seen huge gains and those who bought when the price was over $1000 have not since had an opportunity to mitigate their losses. As the market matures, Bitcoin’s volatility will decrease and it will then be more sensible for consumers to use it as a currency because the possibility of making gains of the same scale as people have done in the last few years will be much less. There will still be trading of the sort that exists today just as people make their living from FX trading but not on the same scale.
“Bitcoin’s volatility will decrease and it will then be more sensible for consumers to use it as a currency” Storage, Acquisition, Security For those who are not technically-minded, storing Bitcoins can be laborious and risky. If the proper steps are not taken to ensure a wallet’s security, such as encrypting it and protecting with a password, it is child’s play for a hacker to steal your Bitcoins. One solution for this is to enlist a service that offers cold storage to consumers. However this is a difficult decision to make if you do not trust the service.
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It is also surprisingly difficult to acquire Bitcoins in the first place. There are many exchanges with good and easy to use interfaces but before that the exchange usually go through the KYC (Know Your Customer) procedure, requiring a copy of your passport and sometimes another form of ID, which takes about 3 working days. Going through an online exchange is the easiest way to acquire Bitcoins in our experience. In addition there is little coverage for the customer in the event that an exchange collapses in the majority of cases (exceptions include Bitcoin-Central). Uncertain Regulation As cryptocurrencies (chiefly Bitcoin but others also on the back of Bitcoin’s success) are starting to gain a lot of traction in the financial world, governments have been faced in the last couple of years with regulating this new phenomenon that few people know anything about. There are different views on how Bitcoin should be taxed: property or a unit of account/private money. Other than that governments are for the most part not actively involved in regulating Bitcoin activity. Because of this, from a bank’s point of view they have to do all the KYC, AML, CDD and CFT themselves, costing time, money and risk that they are not willing to pay.
“The process of widespread adoption can truly begin when the general public is informed about how Bitcoin fits in to the financial world and how it is applicable to them as individuals” Information Bitcoin is not mainstream knowledge. It undoubtedly will be at some point in the future but not yet. This is the biggest barrier to adoption; how can a person be actively involved in something they do not know exists? Even if someone is aware of the concept of Bitcoin, getting past having a basic understanding can be tricky if you are not aligned with useful sources. There is a lot of conflicting information about the finer points, which is understandable since this is still a very new idea but not at all useful for an average Joe who just wants to know what a Bitcoin is. The process of widespread adoption can truly begin when the general public is informed about how Bitcoin fits in to the financial world and how it is applicable to them as individuals. Many will still reject the idea and it may take a change in attitudes as well to achieve worldwide usage
Bitcoin’s Negative Press You may have heard the term ‘Goxed’, for example, “I’ve got some Bitcoins with this exchange, I hope I don’t get Goxed.” This refers to losing your Bitcoins through the fault of an exchange or third party who is holding them for you, as happened to those who stored Bitcoins with Mt. Gox. This is perhaps the best example of negative press for Bitcoin. The fact that an expression exists which describes the situation shows how widespread the knowledge of this event is. The other big source of negative press comes from Russia’s and China’s attitudes towards Bitcoin and cryptocurrencies. China’s central banks have said they will not engage in any Bitcoin activity while Russia, taking a harsher stance, has said that Bitcoin is illegal there. Numerous have been reports of arrests of people involved in illegal activities (such as money laundering) and using Bitcoin.
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“You can’t stop things like Bitcoin... It’s like trying to stop gunpowder” John McAfee Founder of McAfee Inc.
Conclusion
To be continued... We have examined many aspects of Bitcoin and cryptocurrency in general: where Bitcoin came from, how it compares to currencies already in existence, the technology behind Bitcoin, its place in the financial world and more. It is worth pointing out that we (the authors) are optimistic about the future of cryptocurrency and as such some of the opinions expressed may be more positive than those who are more pessimistic or have more to lose from the advancement of this technology due to conflicting interests.
“As for the future, nobody can really know what will happen in either the short or long run� As for the future, nobody can really know what will happen in either the short or long run. Our view is that cryptocurrency could be a huge part of the global economy in the future, provided that governments do not take extreme measures to suppress it as Russia, China and Ecuador already have done.
Whether Bitcoin will be a major player in the long run is also difficult to predict, but for now it is the rising star of the cryptocurrency world. It may be one of the multitude of others that exist, a combination of currencies or a descendent of any of them that come out on top. As to whether fiat currencies are now obsolete: no. We think it to be far more likely that the two will exist together in a global hybrid economy and it will take time to reach that point, where widespread adoption has occurred. It is also worth noting that this document is not meant to provide all the answers, but it will provide many! It is intended to generate interest for and knowledge about what may be a giant leap forward. This research document is for internal use only and should not be circulated outside Capital International Group.
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“What can’t kill Bitcoin, makes it (us) stronger” M ar k W i t t k o wsk i O nl i ne m a rk e t e r
Case Studies
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Investors and Backers Who is Tim Draper?
What do they have to do with Bitcoin?
Tim Draper is a venture capitalist, and Founder and Managing Director of DFJ, a large American private equity company that in the past have funded Baidu, Hotmail and Skype. His son, Adam, runs a venture capital accelerator program for DFJ; a program designed to fund, support and improve new ventures.
The twins were among the unsuccessful bidders at the Silk Road Bitcoin auction, losing out to Tim Draper. Despite this they are rumoured to own approximately 1% of all Bitcoins in existence, a figure in the region of 100,000 bitcoins. The Winklevoss twins are big supporters of Bitcoin, saying that its current (at the time of saying) market cap of $4 million could one day be $400 million. They have also invested in several Bitcoin-related businesses.
What does he have to do with Bitcoin? He recently won the auction of the 30,000 bitcoins seized from Silk Road. He plans to use these as a liquidity source for use in emerging markets, particularly ones that utilize Bitcoin. In order to facilitate this he has partnered with Vaurum, an exchange that caters for financial institutions rather than individuals. Who are the Winklevoss twins? The Winklevoss twins, Cameron and Tyler, are American entrepreneurs, venture capitalists and rowers. They are most known for suing Facebook creator Mark Zuckerberg, claiming that he got the idea and some source code from their social networking site, ConnectU. This is also the subject of the film, ‘The Social Network’.
Who is Reid Hoffman? Reid Hoffman is the founder of LinkedIn, Exec. VP of PayPal, entrepreneur and venture capitalist. What does he have to do with Bitcoin? Hoffman is an advocate of Bitcoin, saying that he is interested in a three-to-five year investment plan for it and that he believes the technology behind it (specifically the public ledger) is an ‘incredible system’. He also invested in Xapo, a company behind a Bitcoin debit card (similar to ANX).
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“This may be the purest form of democracy the world has ever known, and for one I am thrilled to be here to watch it unfold� P aco A h lg re n Fi nanc i a l A n a ly st a t W i - F i Al l i a n c e
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Silk Road What is Silk Road?
Isn’t Silk Road operational again?
An online marketplace that accepted bitcoins as a form of payment and mainly sold, amongst other things, illegal drugs. It also operated through the TOR network, giving users increased anonymity.
Yes and no. Clones of the original website have been set up and currently operational offering the same service and products using the same appearance even though the original site has been shut down. Since the original shut-down two more of the original administrators, “Indigo” and “Libertas”, have been arrested.
Why has it been in the news? The original site has been seized by the Department of Homeland Security and several arrests have been made in connection with the movement of narcotics purchased from the site. Also the owner, going by the pseudonym ‘Dread Pirate Roberts’, was arrested. The US Marshals seized the Bitcoins belonging to Silk Road in a raid and have auctioned some of them off. Who received the Bitcoins? Entrepreneur Tim Draper won nearly 30,000 Bitcoins at auction, worth about $17 million dollars. He and his son, Adam plan to invest them in new bitcoin related businesses.
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The Exchanges What was Mt. Gox? A bitcoin exchange based in Japan. The domain name was originally created to facilitate Magic The Gathering trades. Why was it in the news? After becoming the largest bitcoin exchange in the world Mt. Gox filed for bankruptcy after several trading incidents where Bitcoins were lost or stolen. In February and March of this year Mt. Gox collapsed and is no longer operational. What was the fallout from the collapse? Upwards of 800,000 Bitcoins were lost, only 100,000 of which belonged to Mt. Gox, the rest belonging to consumers. Approximately 200,000 of these were found in an old digital wallet some time afterwards. Most of these had been stolen years before but had gone undetected by the company and had probably been siphoned off over a period of months. How did this affect the value of Bitcoin? From the beginning of February to the beginning of March the market price of Bitcoin fell from around $800 to just below $600. By the end of March the value was approximately $500. It is reasonable to assume that the fall of Mt. Gox played a significant role in this due to the fact that many people’s confidence in Bitcoin was shaken.
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Does Mt. Gox reflect other Bitcoin exchanges and Bitcoin as a currency? In short, no. The fault was with the way in which Mt. Gox was run and this, even though it was catastrophic for the investors involved, should not mar the image of bitcoin exchanges as a whole. In the same way it should not reflect badly on bitcoin. It should just be a warning of what can happen when Bitcoins are handled poorly or carelessly. It should be noted that this is not the only illegal exchange that has been shut down: early July 2014 was the first time an illegal exchange in France was shut down. Will Mt. Gox ever return? There are several groups seeking to acquire Mt. Gox’s assets, including Sunlot Holdings and BitOcean Japan. The former are looking to effectively relaunch the site with similar branding while the latter is going to open a new exchange. BitOcean, a collaboration between Chinese ATM producer BitOcean and New York-based exchange technology platform Atlas ATS, will open the exchange regardless even if they are not successful but will use the assets to bolster themselves if possible. It may result that Mt. Gox will be liquidated and its remaining 200,000 Bitcoins will be sold instead of being rehabilitated under either company.
What is Coin Corner? It is the first Bitcoin exchange based in the Isle of Man; trading in GBP, USD and EUR. Bitcoin, Dogecoin and Litecoin can be purchased; currently the world’s three main cryptocurrencies. What is Paymium? It is the first Bitcoin exchange to operate under European regulation (partners with Aqoba, a licensed payment services provider) and to guarantee the safety of its customers’ fiat deposits up to €100,000. It trades only between EUR and Bitcoin. What is Netagio? Netagio is a British Bitcoin exchange, and the first to offer exchange between Bitcoin, Pound Sterling and gold. It also stores users’ Bitcoins offline in cold storage.
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Interesting Stories What is Fidor?
What are Dogecoin and Litecoin?
Fidor Bank AG is a German bank which has partnered with Bitcoin exchange bitcoin. de, allowing account holders to purchase Bitcoin. It also utilises the Ripple network for some intra-bank transfers. This is the first European example of an exchange having a formal cooperation agreement with a bank.
If Bitcoin is the world’s premier cryptocurrency then Dogecoin and Litecoin place second and third. Like Bitcoin, they both have denominations of 100 million within each coin. Unlike Bitcoin, their individual coins are far less valuable: at the time of writing 1 Litecoin is worth approximately $8.50 and $1 will buy you over 4,000 Dogecoins. There are orders of magnitude of difference between these and the value of 1 bitcoin.
What is Bank of Dave? Bank of Dave was a Channel 4 documentary about Dave Fishwick, who believed he could offer a better service than the high street banks by setting up his own bank in Burnley. Why is this relevant? Dave Fishwick showed that it was possible (extremely difficult but possible) to open a bank by yourself. If one day much further into the future some bigger banks start to become redundant due to the rise of cryptocurrencies, some individuals may have to set up businesses like Dave. Thanks to him we know that it can be done. How does a Bitcoin debit card work? A Hong Kong exchange called ANX has released a Bitcoin debit card. Bitcoins can be put on the card by selling them to the exchange in return for the equivalent amount being credited to the card in USD. Deposits can also be made in ten other world currencies but the card is always credited in USD. This card aims to solve the problem of Bitcoins not being widely accepted by merchants: users can use their Bitcoins to buy goods via the medium of the card’s USD. Xapo and expresscoin are bringing out similar products. Capital International Group
What is the future of these currencies? These two currencies have the potential to form a big part of the future economical landscape together with Bitcoin. Bitcoin has proved that a cryptocurrency is capable of a meteoric rise and is approaching mainstream knowledge-if not mainstream use-fast. Either way, it is extremely difficult to predict what will happen with these currencies. Few saw the potential of Bitcoin at its inception and those that invested early saw huge gains. What are Bitcoin Centres? Bitcoin Centres are institutions set up to inform the public about cryptocurrencies and foster enthusiasm, since the subject is still not mainstream knowledge. The three most prominent of these are ‘Bitcoin Centre NYC’, ‘La Maison du Bitcoin’ and ‘WBTCB.CZ’, located in New York, Paris and Prague respectively.
What specifically do they do? Generally they hold seminars, talks and have exhibits that are designed to be informative on varying levels of detail, since the audience has wildly different amounts of experience and knowledge. In addition, the New York Centre’s co-founder, Nick Spanos, hopes to open a regulated Bitcoin exchange off the back of the centre. Unfortunately, his hope that it would be the first of its kind in the world is no longer possible, Bitcoin-Central having beaten him to the punch. Who accepts Bitcoin? Some brick-and-mortar businesses are starting to accept payment in Bitcoins in different forms. Acceptance is more widespread in online shops. It is not limited to specific industries, either: the website wheretospendbitcoins.co.uk details companies in industries as diverse as accounting, estate agents, B&Bs, gyms, pubs and window cleaners, all of which accept Bitcoins. What about specific examples? Beepi is a used car marketplace that accepts Bitcoins. It utilises a payment service called Bitpay, meaning that the company does not hold Bitcoin even though the buyer can pay with it. Online shops Newegg.com and bitcoinshop. us also accept Bitcoins in the same way. Two of the most notable companies that accept Bitcoin are Expedia and, more recently, Dell.
How does Islamic Finance differ from conventional finance? Islam is based on the principles of Sharia’a, and banking and finance is no different. The main difference between the two systems is that Islam deems making money with money immoral, meaning the earning interest or usury (called Riba) is prohibited. This means that wealth is generated through trade or investments with the provider and the user of the funds sharing the profit or the loss. In addition, Gharar and a subsection of it, Maysir, are forbidden. These are having unnecessary ignorance and gambling respectively. This means, for example, that shares cannot be sold if the price is still to be decided and that there cannot be the possibility of total loss for either party (day trading could fall under the latter category). Could there be a market for the use of Bitcoin in Islamic Finance? The simple answer is that it is very unlikely. The biggest barrier in the way of its use in Islamic finance is the incredibly volatile and unpredictable nature of Bitcoin (and of cryptocurrencies in general). This would violate Maysir, because all those who invest in Bitcoin have the potential to lose everything if the currency were to become worthless.
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Sources Websites
auroracoin.com bitcoin.org bitcoin.stackexchange.com bitcoinbullbear.com bitcoincharts.com bitcoinmagazine.com bitcoinpaperwallet.com bitcoinquotations.com bitcointrezor.com blockchain.info businessinsider.com cisi.org cityam.com coincorner.com coindesk.com coinfloor.co.uk coingecko.com coinmill.com coinprism.com coinstackr.com cryptoarticles.com cryptocoinsnews.com ehow.com en.bitcoinwiki.org
en.wikipedia.org financialsense.com forbes.com forexthink.com fxstreet.com ghash.io gov.im guardianlv.com ibtimes.co.uk investopedia.com iomtoday.co.im kraken.com lamassu.is marketingmagazine.co.uk mdca.im mtgox.com netagio.com ripplelabs.com rippletrade.com telegraph.co.uk thebitcoinnews.co.uk theguardian.com uk.linkedin.com youtube.com Additional Graphics The Noun Project Arrow by Cengiz SARI
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