For the first time in our history, we can send money around the world in a secure manner, with virtually no transaction fees. That in itself is huge, but is only one of the many facets of Bitcoin that has the potential to change the world as we know it. From the underlying technology to the potential uses, we are at the beginning of the deepest societal shift since the roll-out of the Internet. The way we do business, the way we pay for things, even the way we exchange ideas and create… This is a shift that will over the next decade or so change the lives of everyone, from financial sectors to emerging economies, from musicians to farmers, from start-ups to big banks.
The Bitcoin technology is based on advanced cryptography – which means that transactions are virtually impregnable – and rapid information distribution – which means that the whole network knows what the rest of the network is doing, almost instantaneously. The network is run by all the participating “mining nodes”, which verify transactions and transmit updates to other nodes. Anyone with the right computer hardware can become a “mining node”, which means that Bitcoin is run by anyone who wants to participate. Which brings us to the first world-changing idea:
The concept is mind-blowing. The money that we’re used to – euros, dollars, yen, whatever – is issued by a Central Bank and/or controlled by a government. We have absolutely no control over the value of the money that we use. The value of the cash in our pocket or the money in our bank account is decided by hundreds of factors including our local interest rates, the interest rates of other currencies, the economic growth expectations of our economy, and of other economies, and supposedly of the amount of money in supply. I say “supposedly”, because no-one actually knows what that is. Governments (or Central Banks) can print money when they want to, but once they’ve done that, that money then generates more money through bank lending (they take your deposit and lend part if it out, which then becomes another deposit, part of which is lent out, etc.). And as we saw with Greece, governments can decide to restrict your access to your money. They can, as with Argentina and more recently China, say that your money is worth a lot less today than it was yesterday. They can restrict how much you can take out of your country. There is nothing you can do about this. You don’t have nearly as much control over your money as you think you do.
Bitcoin is decentralized money. It is not controlled by any one group. No-one can decide to change the value, no-one can decide how many there are in circulation, no-one can decide whether it’s legal or not. The value of the bitcoins that you hold is purely decided by the market, which is virtually impossible to manipulate. True, not everyone is obliged to accept bitcoins, as with local currencies. But it is getting easier and easier to swap bitcoins for local currencies as and when you need them.
That makes Bitcoin increasingly valuable as a way to transfer remittances, or payments foreign workers send home to their families. Remittances are estimated to be a $600bn market. But of that money that workers in the US, UK, Germany, etc. send home to their families in emerging economies, about $60bn gets taken out in fees. Imagine if more of that money could actually reach them. Think of what that extra amount could do. It could feed, clothe, educate, instead of ending up as financial profit for the money transfer institutions.
True, turning bitcoins into kwacha, dirhams, etc. is not always easy. But exchanges, both international and local, are spreading, regulation is evolving, and more and more local merchants understand that Bitcoin is a convenient way to accept payments. This situation will improve.
The potential of Bitcoin used for remittances has an even bigger impact when you consider that 64% of the adults in sub-Saharan Africa, 54% in South Asia, 49% of Europe, Central Asia, Latin America and the Caribbean do not have a bank account. Several countries have developed mobile banking networks that use phone minutes as a currency, bringing efficiency and a method of saving to those who previously relied exclusively on cash. Yet these networks are local, which limits their use, especially in times of increased migration. Mobile money users already have a phone, and are used to the concept of digital payments. Bitcoin will allow them to broaden their scope to include cross-border transfers, international purchases, downloads, access to educational content, and much more. More importantly, they will have exclusive control of their bitcoin balances.
With Bitcoin, you are your own bank.
And your own notary. Today, when you buy a house or a car or a share of a company, you have to wade through piles of paperwork, incurring costs and delays along the way. The paperwork is necessary to ensure that you are who you say you are, and that you’re buying from the rightful owner. Bitcoin, or rather, the underlying technology, condenses all that into a single piece of code. Not only transfers of money become almost instantaneous and cost-free. Transfers of ownership can also be done the same way.
Which brings us to a brief explanation of why Bitcoin is so secure. Using very high-level cryptography, transactions are made with a combination of secret and public keys, which together serve as bitcoin address and encrypter. These transactions are then verified by the entire network, and grouped into relatively small blocks. Once a block is accepted by everyone, it gets added on to the previous block. Each block contains a special code that refers to the previous block – this leads to what they call the “blockchain”. No previous block can be changed or altered without changing or altering every block that comes after, which would be impossibly difficult to do.
Because the technology is so secure, if the blockchain says that you are the rightful owner of that building or that work of art, then you are. And just as you transfer ownership of bitcoins when you make a payment, you can also transfer ownership of other assets that you have wedged into your Bitcoin code. This is the main reason that banks and governments are so interested in Bitcoin, for the potential efficiencies in asset transfer. Even NASDAQ will start trading private company shares using blockchain technology later this year, and the New York Stock Exchange has invested in Bitcoin company Coinbase. Just a few weeks ago we saw the first blockchain share offering. This is all new, but it’s evolving quickly.
The scale of innovation in the financial sector due to the creation of Bitcoin is staggering, and we’re only just getting started. There will be stumbles along the way, many Bitcoin startups have failed, but even more are re-thinking the way we do businesses, the way we transact and the way we store value. Bitcoin has limitations, but bright minds are finding ways around these, and in the process are coming up with solutions to problems that we thought unsolvable. Virtually every week we read about a big step forward in what Bitcoin can do, and we are starting to see crazy-sounding ideas become not-so-crazy reality. Just as we had no idea of what the Internet would become back in 1995, it’s difficult to imagine today what Bitcoin and the blockchain will become 10 years from now. But it’s fun trying.
There are always risks associated with new technologies and uses. The increasing use of Bitcoin for money transfers could increase financial instability (although I would say that we have that anyway). Bitcoin as a currency may become marginalised (although now that we have the technology, something else will spring up to take its place). Increased and/or fragmented regulation to control money laundering may well dampen some impressive initiatives (which we hope will work to find a way to comply and innovate at the same time). Hacking and subsequent loss of bitcoins will always be a threat (although security is improving all the time, and the threat of hacking is not unique to Bitcoin or the blockchain). An increasing dependence on bits and bytes leaves us more vulnerable to cyber-terrorism and energy shortages (which is why all technology sectors are working on developing offline backups and redundancies). And risks will materialize that we haven’t even thought of yet.
The important thing to realise is this: the development of Bitcoin and its blockchain technology has given us a tool that can improve profits, efficiency and distribution of wealth. As with any new tool, the obvious applications have huge potential, and they alone will change the world, for the reasons discussed above. The not-so-obvious applications are even more exciting, as they will take the initial effects and extend them beyond the limits of our imagination. Just as our kids don’t remember a world pre-Internet, our grand-kids will gawp at how inefficient the early 2000s were in comparison to their world. By then the blockchain technology will be so mainstream that they’ll have a hard time imagining a world without it.
(I also write about Bitcoin and related trends at fintechblue.com.)