bitcoins

Bitcoin and other digital currencies have captured the attention of the media, entrepreneurs, and regulators. The coverage has described exchange meltdowns, price volatility, and government crackdowns. However, the focus on Bitcoin as a currency may distract businesses and governments from its disruptive impact: as a technology.

 

 

Bitcoin is more than just a new way to make purchases. It is a protocol for exchanging value over the internet without an intermediary. Bitcoin is based on a public ledger system, known as the blockchain, which uses cryptography to validate transactions. Bitcoin users gain access to their balance through a password known as a private key. As a result, Bitcoin is peer-to-peer and open, yet secure and nearly frictionless. Much has been written about the payment applications of Bitcoin,including remittances, micropayments, and donations. However, Bitcoin could disrupt other systems that rely on intermediaries with a similarly open, peer-to-peer system, including property, contracts, and identity management.

Anywhere a transaction between two parties has traditionally required third party validation, Bitcoin may be applicable. Consider these three common actions:

Transfer of property. The Bitcoin protocol could simplify complex asset transfers, revolutionizing the services that support this industry. Currently, the transfer of large assets requires significant time and resources. For example, in order to purchase a car from an individual seller, one has to engage a third party to transfer the title. Additionally, one has to use services like Carfax to learn about the car’s accident and inspection history. And who doesn’t like to spend a Saturday at the DMV updating a car registration?

The blockchain could change all of this. Bitcoins can be qualified in such a way that they represent real-world assets. Bitcoin entrepreneurs at companies like Colored Coin are already working on ways to use small portions of Bitcoin to denote physical property. A fraction of a Bitcoin would publicly identify who currently owns that property, and could include a record of both past ownership and other history about the property. When purchasing the car, one would be able to verify all accidents and inspections over the blockchain and transfer the title on site. Similarly, real estate and financial instrument transactions could all be executed over Bitcoin.

This could soon create efficiencies and reduce friction by allowing individuals to directly transfer property without the use of a broker, lawyer, or notary to sign-off on the transfer.

Execution of contracts. Bitcoin could similarly be used to structure contracts, bringing new efficiency and transparency. Contracts are typically developed by lawyers on a case-by-case basis with significant time and resources devoted to negotiation, development, and enforcement. Additionally, markets based on contracts, including certain financial derivatives markets, lack transparency, which complicates regulation.

Traditional contracts could be replaced by code, executing themselves when a triggering event occurs. In a simple example, a financial instrument, like an option, could be developed and executed over the blockchain. In addition to reducing legal fees, this could bring new transparency to financial markets, as regulators could use the public ledger to understand the market without forcing individual actors to reveal their specific positions. It is possible that new crypto-currencies will emerge to serve these niche purposes.

New ventures, like Ethereum, are creating these capabilities today. Ethereum is developing a network to serve as both the registry and escrow to execute the conditions of a contract automatically through checkable rules.

Identity management. Bitcoin’s cryptography could also transform identity management. Much of identity management, including passports, still operates on a paper-based system. These documents are frequently forged and stolen. Interpol’s database currently lists 39 million stolen travel documents. Instead of carrying paper documents, what if there was a way to create a unique, verifiable key that was impossible to forge?

A cryptographic network similar to but separate from Bitcoin could be used to verify individuals’ identities and monitor movement across borders. When a person travels through a checkpoint at a border crossing, instead of showing and scanning a paper passport, she could present her private Bitcoin key. A network privately maintained by the government could verify the key and register the entry into the ledger. This system, based on cryptography instead of paper documents, would simultaneously increase mobility and security. If Bitcoin can be used for travel documents, it could also be used for other forms of identity management like social security numbers, tax identification numbers, or even driver’s licenses.

Property, contracts, and identity management are only a few examples of how a peer-to-peer, open, and frictionless system could change how we conduct business in the future. In order to achieve this wider adoption, Bitcoin will need to address significant questions around trust, ease of use, and operability. However, the Bitcoin community has shown remarkable adaptability and is already working to mitigate these problems. In the next decade, we can expect significant innovation around the Bitcoin network. Much of that will revolve around payments, particularly early on. The real value, though, lies beyond.

Photo credit: Extension

Via Harvard Business Review