Bitcoin is Money over IP: what can you do with that?

Recently, it has become fashionable for seemingly rational fin-tech experts to extol the virtues of the Blockchain while attempting to distance its revolutionary potential from Bitcoin, the fundamental technology underlying the Blockchain. A Blockchain without Bitcoin is called a database, and we have had that technology for many years. The above image was tweeted by Marc Andreessen a while back to visually communicate the absurdity of this notion that the Blockchain may have value independent of Bitcoin. So when you hear someone uttering this nonsense, please treat them with compassion and empathy as a fellow seeker of enlightenment, and perhaps share the below summary to help this pilgrim along the path. Unless of course this person is a paid mouthpiece intending to spread FUD by the industries that stand to be toppled by Bitcoin, in which case you may be wasting your effort. Your call, my good friends.

Bitcoin the Protocol can be seen as the natural progression of an evolution that began with client-server networks and led to TCP/IP which provides the fabric of the global Internet. Soon thereafter we had SMTP for email, HTTP to render text and graphics for web browsers, and social networks to facilitate the sharing of photos and personal stories. All of these IP-based technologies have enabled the global, low cost distribution of information. And with the release of the open source Bitcoin protocol in 2009, we have since obtained the ability to TRUST that information over Bitcoin the Network, without the need for any intermediary between the sender and the receiver.

And what could be a more killer app for that trusted packet of information than a financial transaction? The Bitcoin Protocol’s use of cryptography and proof-of-work incentives has in effect transformed the global public Internet into a low cost, secure payments network. And as the only unit of account that can be transferred on the Blockchain, bitcoin (lower case ‘b’) the Currency (BTC) gives us (cue trumpets): “Money over IP.”

Hallelujah, the heavens have delivered the first monetary system for the Internet that has been purpose built to address the inadequacies of traditional payment methods that were never intended for online commerce. The global payments industry generates more than $500 billion in annual revenues from transaction processing. Prior to Bitcoin, however, all innovation in financial technology (Visa, PayPal, Stripe, Square, etc.) has been layered upon complex, decades-old payment systems that utilize proprietary bank networks, requiring multiple parties to authenticate, process and settle a transaction. Enter stage-left: the Blockchain, a transparent, distributed ledger through which mathematically verified bitcoin transactions can be processed without the involvement of any bank or financial network. The genesis block on the Blockchain contains the following headline from a UK newspaper article: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” And thereafter, forever: In Math We Trust.

For merchants, Bitcoin represents an opportunity to accept payments directly from consumers around the globe as payment in exchange for goods and services while eliminating many of the costs and risks inherent with accepting card-based products offered by the incumbent payment networks. Gil Luria from Wedbush Securities predicts that 10% of $5.9 trillion in online payments will be conducted using Bitcoin by 2025.

For consumers, Bitcoin provides a method to make electronic payments, transfer funds cheaply and store value on the Blockchain, thus extending the reach of financial services to billions of people who have a mobile phone but no access to a bank account. Over 80% of the global population of millennials reside in emerging economies, and Bitcoin-based services will likely leapfrog traditional bank systems in those markets much like mobile phones eliminated the need for landlines. Bitcoin allows anyone with access to the Internet to transfer value to anyone else, and IP-based messaging applications have the potential to enable hundreds of millions of subscribers to hold and transfer BTC as easily as sending a message. Once more, with vigor: Money over IP.

Elimination of payment fraud? Borderless, frictionless, low cost remittances for consumers and businesses alike? Storage of value outside the control and manipulation of sovereign currencies by inept, short-sighted governments and central banks? Machine-to-machine micropayments that power the Internet of Things economy? Does any of this sound useful to you?

Of course, technology this profoundly disruptive can tip over a lot of apple carts: a bitcoin (or one of its 100 million possible subunits called ‘satoshis’) can also be traded as a token within an endless array of Blockchain-based systems to streamline securities dealing, real estate transfers, car titles, voting and an entire host of government services. These systems can be structured as closed-loop ‘sidechains,’ bitcoins can be marked with conditions to create ‘colored coins’ to restrict their use to certain applications, and alternative ‘private’ Blockchains with new currencies can be created … but all at the risk of losing the critical mass and network effect value of Bitcoin, the strength of its computational foundation and, perhaps worst of all, the insidious creep of counter-party risk that has been eliminated by decentralized design in the Bitcoin Network.

So whatever the Blockchain strategy being pursued, why the reluctance to utter the word ‘Bitcoin’ during press releases and interviews by executives to announce their bank’s mounting investment of R&D funds into ‘Blockchain’ initiatives? I suspect part of this hesitation is rooted in the baggage associated with BTC as the currency of Silk Road and the dark web. Using bearer instruments to finance nefarious activities is nothing new to mankind, and while digital currencies can provide compelling efficiencies compared with the ‘fat stacks of Benjamins’ that need to be physically shipped in steamer trunks, it will likely take many years before any digital currency topples the US Dollar from its mantle as the criminal world’s currency of choice. And as any Bitcoin exchange, processor or wallet provider can attest, our industry’s participants are being held to the highest standards by banks and regulators to institute AML/KYC policies and transaction monitoring systems that help protect our financial systems from being used for illicit activities.

Some of the negativity may also stem from the smoking wreckage in the rear view mirror of the MtGox exchange failure, where a trading bot installed by an insider apparently siphoned off millions in BTC due to the lack of rudimentary financial controls or monthly account reconciliations. There have also been successful perimeter breaches, spear-phishing of account credentials and other cyber-crimes that have purloined private keys from exchanges and processors. But all of these incidents are attributable to security lapses in IT systems, and not to any aspect of BTC itself. Criminals can rob the contents of a safe just as easily as they can steal bitcoin, if they succeed in obtaining control of the vault.

So is this etymological gamesmanship over the word Bitcoin much ado about nothing, really? To paraphrase Juliet’s rumination about the irrelevance of a label, “A Bitcoin by any other name would smell as sweet.” If you love the Blockchain, then you must love the Bitcoin. Own it, my people, wear it — let your Bitcoin flag fly, and the Truth will set you free. Congregation, do I have a witness?

John McDonnell

CEO Bitnet