I have to admit to not paying much attention to Bitcoin. I assumed the cyber-currency’s gyrating value and somewhat shady reputation would eventually lead to its demise. But despite recent speed bumps (see below), this digital currency refuses to die. Today, the outstanding value of Bitcoin currency is approximately $16 billion. It remains particularly popular in countries with less secure currencies or financial institutions, or where currency flows are restricted. More than 90% of the world’s Bitcoin trading takes place in China today.
Bitcoin was first conceptualized in 2008 by some programmers whose principal aim was to create a global currency free from the reaches of central banks. Ironically, this libertarian minded goal is now contributing to its current difficulties. Early this year, the Peoples Bank of China stepped up efforts to curtail Bitcoin exchanges precisely because of suspicions that the currency was being used to facilitate capital flight out of the country.
Bitcoin looks unlikely to replace the greenback any time soon but blockchain, the technology underpinning Bitcoin, may well have a larger impact. Blockchain is a combination of technologies (database, software and computer networks) which allow participants to share any kind of trusted data without the role of a central policing authority. Trust, the key component of blockchain, develops for two reasons; first, every participant can inspect and confirm all data in real time. Second, thanks to some pretty slick cryptography, attempts to alter any part of the stored data are immediately apparent.
While blockchain may seem just like a fancier form of spreadsheet accounting, its applications could have a big impact on how global economies function. Today, transaction processing of all types requires a trustworthy record of who owns what and how that changes over time. Typically, this time consuming and messy job has fallen to intermediaries such as central banks and other financial clearinghouses. Blockchain technology has the potential to eliminate these middlemen and in doing so, improve accuracy, increase speed and reduce costs.
The financial services industry has shown the most interest in the technology so far. Twenty-five banks today are working to develop common standards for a blockchain network, and electronic stock exchange NASDAQ is expected to begin using the technology to record trading in private company securities. Outside of financial services, government officials in Honduras and Greece are looking into how they can use blockchain’s distributed ledgers to improve land records. The World Economic Forum estimates that over $1.4 billion has been invested in blockchain technology over the last three years.
Despite the early rush of enthusiasm, blockchain’s path to commercialization is unlikely to be a smooth one. Concerns remain about its integrity, and its underlying data verification process requires large amounts of computing power – a drawback for system architects and environmentalists alike. Ultimately, wider adoption will require a good deal of cooperation both within and across industries and regulatory clarity. Both of which can be hard to come by.
While big transformational changes will take time, incremental uses of blockchain technology may appear in the not too distant future. Smart contracts which allow online agreements between parties such as for car rentals are being explored, as are shared ledgers for private “vetted” users. While Bitcoin may pass from the scene as a world currency, I suspect the underlying blockchain technology may very well alter how the world processes and transmits sensitive data.