A paper was posted on the Internet by Satoshi Nakamoto in November 2008, “Bitcoin: A Peer-to-Peer Electronic Cash System”. The paper described a system where Bitcoin, a digital currency, can be used to buy and sell goods and services or to just buy and hold the Bitcoin. Currencies such as the U.S. dollar, the Canadian dollar, or the German Deutschmark are called fiat currencies. Fiat money is currency a government has declared to be legal tender for buying and selling. Some people buy foreign currency and hold on to it as an investment, just like stocks, bonds, or commodities.
To buy or sell Bitcoin requires having a digital wallet. I acquired mine in 2013 from Coinbase, a San Francisco startup with more than $500 million of venture capital behind it. (Disclosure: I am an investor in Coinbase). There are millions of digital wallets and thousands of merchants who accept Bitcoin in payment for goods and services, although most of them we never heard of. Wallets and merchants will grow dramatically, in my opinion, especially with Facebook’s announcement this week of its new Libra cryptocurrency. Some say Libra is the end of Bitcoin. I say it is the beginning, a booster. Maybe that is why Bitcoin has risen above $9,000 since the Facebook announcement. Once it all comes together with the joining in of 100 companies who will be part of the Facebook initiative, cryptocurrencies will offer many new options to consumers.
In the U.S., having a digital wallet and buying things with Bitcoin is not really necessary. Most Americans have easy access to credit cards for that purpose. However, in some countries, large numbers of people do not have credit cards or don’t trust their government’s oversight on currency. Another problem cryptocurrency will solve is the outrageous tens of billions in fees migrants pay to send money back home.
Cryptocurrencies use blockchain technology. A blockchain is a distributed ledger where transactions are recorded, and exact copies of the ledger are maintained on servers operated by people or companies who are part of the digital currency network. There can be thousands of servers. The more copies of the ledger, the better. The reason for multiple copies is blockchain technology requires consensus. All of the server copies of the ledger have to be in agreement. If someone hacks into one of the servers and tampers with the ledger, the attempt will be rejected because the majority of the servers will not agree. The requirement for consensus in the blockchain creates a very secure system.
A blockchain is not limited to handling digital currencies. Just as a Bitcoin transaction can be recorded in a blockchain, contracts and assets can also be recorded. Transactions associated with the contract or asset are stored in a block and blocks are then linked to each other, hence the name blockchain. A block is updated by consensus of all the servers who are running the blockchain software. The consensus is based on rules agreed upon by parties to the transaction. Once the record of a transaction is placed in the blockchain, it can never be altered. Records of transactions are stored at multiple locations which all compare their blockchain to all the others. As a result, discrepancies are instantly identifiable. Systems built on a blockchain include rules specifying what each user can see or do, depending on their role. The result is that each transaction can be trusted because it is secure, private, authenticated, and verifiable. Nearly every industry and type of transaction can potentially benefit from blockchain technology.
Examples are birth and death certificates, marriage licenses, deeds and titles of ownership, educational degrees, financial accounts, records of medical procedures, insurance claims, votes, as described in Election Attitude – How Internet Voting Leads to a Stronger Democracy. A blockchain ledger is accurate because mass collaboration constantly reconciles it.
Peter Williams, a technology executive at IBM Corporation, described how blockchain technology might be used to track car ownership and registration.
I recently bought a used car, for which the previous owner had lost the title document. The ensuing paper chase and time wasted dealing with my local DMV prompted my usual frustrated thought that “there has to be a better way!” With a blockchain, there is a better way. Imagine my car – model, VIN number, registration number – as an entry in my state’s car ownership “ledger”. All the parties to its lifecycle – owners, DMV, financier, insurer, police – would have access to the entry to record or view transactions such as change of ownership, registration, loan-pay-off and so on. Transferring ownership would no longer be a paper chase – the previous owner would record online that she had sold the car to me, and I would record that I had bought the car from her. Authenticity could be confirmed by including some details from our respective driving licenses, say. The paired records would be taken as proof of sale, and transfer of title would be instant. DMV would “see” the transaction from its own replicated copy, and automatically issue a new title and registration certificate – which need exist only electronically. Transfer of financial obligations would also be automatic. The whole lifecycle would be encrypted and secure. The previous owner would be able to see her portion of the car’s history, and I would see mine.
I believe innovators will bring blockchain technology and digital currency into all aspects of business and consumer life just like the Internet did. The Internet was initially only used for file sharing and messaging, but it continuously evolved and became more useful. That is what I see happening with blockchain and digital currency technology. Next week, I will share my thoughts on the upcoming (this summer) Apple Card, a totally new approach to credit cards.
