Peer-to-peer digital electronic cash

Bitcoin is not a cryptocurrency.

Too many people get it wrong. As the white paper explains, Bitcoin is a peer-to-peer electronic cash system. In the white paper, it is written, “costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.”

There is a reason for it; Bitcoin is an electronic cash system, not a ‘crypto’ system, and not a currency in any form. I will start detailing the part concerning currency.

What is currency?

Black’s Law Dictionary defines currency as:

Coined money and such bank-notes or other paper money as are authorized by law aud do in fact circulate from hand to hand as the medium of exchange.

[Griswold v. Hepburn, 2 Duv. (Ky.) 33; Leonard v. State, 115 Ala. SO, 22 South. 504; Insurance Co. v. Keirou, 27 111. 505; Insurance Co. v. Ivupfer, 2S 111. 332, 81 Am. Dec. 284; Lackey v. Miller, 01 N. O. 20]

Alternatively, other terms such as virtual currency have developed. A virtual currency is defined as:

A digital representation of value that is not available in physical form but which can be used as a medium of exchange, a unit of account, or a store of value. Virtual currency is stored and transacted in electronic form, and therefore does not have legal tender status in any jurisdiction. Virtual currency includes a subset referred to as cryptocurrencies (an example of which is Bitcoin) which are protected by cryptography.

Unfortunately, the errors around what Bitcoin and other things are have propagated, and many people claim that even Bitcoin is a cryptocurrency.

A subset of virtual currency and digital currency that is protected by cryptography and predominantly generated and exchanged through the use of blockchain. While all digital and most virtual currencies are centralized with supply controlled by the developer of the currency, cryptocurrencies such as Bitcoin are decentralized and not created or controlled by a single central entity. Therefore, supply and value of cryptocurrency is determined by demand.

As such, they fail to even define the notion of decentralized. Even the description used is logically flawed. Virtual currencies are defined as being centralized because the supply is controlled by the developer of the currency. They write that cryptocurrencies would be different because they were decentralized and thus not controlled by a single entity or group (such as a small group of developers as with Bitcoin Core or Ethereum).

The same by nature reflects a requirement for a set protocol. If any party can alter the protocol, then it is not by nature decentralized and is controlled by a single (usually not incorporated) entity. Importantly, the Fifth Money Laundering Directive ((EU) 2015/849) (MLD5) has already been updated to incorporate all of the changes, and unfortunately misuses the terms cryptocurrency within the industry.

Article 1(1) of MLD5 extends the “obliged entities” that fall within the scope of MLD4 in a number of ways, by amending Article 2 of MLD4.

Providers engaged in exchange services between virtual currencies and fiat currencies. Fiat currencies are coins and banknotes that are designated as legal tender and electronic money, of a country, accepted as a medium of exchange in the issuing country, such as the euro. The Commission refers to this type of provider as a virtual currency exchange platform (VCEP).

Importantly, the MLD5 already calls for provisions to:

…combat the risks related to the anonymity, national Financial Intelligence Units (FIUs) should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency.

Crypto

The confusion stems from the fact that ECDSA, the digital signature scheme used within Bitcoin, has a similar basis as elliptic-curve cryptography or ECC. In fact, public-private key schemes within both of them are exactly the same and interchangeable. The difference is that bitcoin is a mere signature. It is sent in clear text. Cryptography by definition is secret writing. Bitcoin is not secret. Unfortunately, here lies the confusion that has become part of the core of the system.

Cryptography simply means secret writing. As explained, many of the mathematical functions used within Bitcoin are similar to those used within cryptography, but Bitcoin is not cryptographic.

Digital signatures are based on the same mathematics as public-key cryptography. Here’s where it ends. Based on does not mean is. A digital signature is a tool that provides a means to validate the authenticity and integrity of any data. It does not provide confidentiality — which is encryption.

E-currency

Bitcoin is not a currency or an e-currency at present, but it could be. Importantly, tokenisation methods allow for the creation of a national currency on top of Bitcoin. Such a system would be an e-currency.

It is not a lost cause even now, and we have the capability to securely tokenise currency offerings on top of Bitcoin.

Unfortunately, many many people have not understood the nature of Bitcoin, currency, or how the system functions. The truth of the matter is, Bitcoin is and was at its heart an electronic cash system that works as a peer-to-peer exchange. It is not because nodes act as peers, but rather individuals do. When Alice and Bob exchange consideration using Bitcoin, Alice sends a transaction to Bob that he can send to the network to be settled. The peer-to-peer process here happens between Alice and Bob, and does not involve the network other than settlement. Too many people have got it wrong.

Far too many people fail to understand what I said. At no point have I said that Bitcoin is a cryptocurrency, a currency in any form, or anything monetary-wise other than digital electronic cash. It is important; there are legislative requirements detailing the handling of currency. The handling of Bitcoin and other electronic systems has now been incorporated into the acts. Having said so, Bitcoin only becomes an e-currency when it is used as a national currency or when it is the basis for any currency that has been built into a script within Bitcoin as a token.

    Craig Wright (Bitcoin SV is Bitcoin.)

    Written by

    My opinions are my own. Eternal student & researcher; plugging Bitcoin from as long as it was lawyer, banker, economist, coder, investor, mathematician, & stats

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