Some refer to Bitcoin as the internet of money. Why? Because they believe Bitcoin will revolutionize the way we transact with each other the same way the internet revolutionized the way we communicate with each other. Some critics argue otherwise. But, quite interestingly some of Bitcoin’s biggest critics are the same institutions and industries that stand to be disrupted by Bitcoin. To some, the idea of Bitcoin replacing our current mediums of exchange is too far-fetched. I would argue that our mediums of exchange throughout history have suffered arguably more drastic changes. As a human race we went from bartering, to exchanging precious metals, to paper money, and most recently to plastic cards with magnetic strips. How do you think people reacted when they were told they would not be buying and selling goods with precious metals, but instead they would be using paper? This was a substantial aberration in the manner people transacted with each other, and it took hundreds of years for there to be consensus on this transition.
On that note, what is Bitcoin? Most people will say that Bitcoin is a digital currency. While at its essence this is not a false statement, if Bitcoin is simply a digital currency it would be inconsequential. Most of our currencies today are already digital. Bank accounts today are digital databases, and we use those bank account to transfer money to and from each other, in electronic form. That is digital money. The reality is that only about 8% of total world currencies exist in physical form. It would seem that if Bitcoin is as revolutionary as some claim, it would need to offer something beyond the digitalization of money, and it does. Let’s discuss some of these characteristics and possibilities.
Banking the Unbanked: As with blockchain in my previous post, I also have a favorite emerging use for Bitcoin, which is giving banking access to those who previously had none. It is estimated that over 1.7 billion adults still do not have access to a bank account, but having a bank account is only half the story. In underdeveloped countries it is often the case that the majority of those who do have bank accounts live hundreds of miles from their nearest bank. But, even in the most remote places on the planet there are cell-phone towers, and even in the poorest places there is often a small solar panel that feeds a Nokia 1000 series phone (or a device of the like), of which billions have been shipped. Bitcoin has the potential to turn each of these devices not only into a bank account, but into a bank itself. Once you have a phone connected to the internet, you have access to the Bitcoin network.
Neutrality: The Bitcoin network is neutral. The network does not discriminate between users in determining access. Once you are willing to pay the network fee – which is minimal – to use the network’s resources, your use of the network is as valuable as every other individual’s use of the network. Some argue this will eliminate spam transactions and I understood this argument when I read it in the form of a spam email analogy. Today individuals and entities can send unlimited amounts of spam email because it is free. What if to send each of these spam emails the sender had to pay a very small and uniform transaction fee? Simply, there would be no spam communications. If the sender paid the fee it means it deemed the communication valuable enough to transmit it. The same logic would apply to spam transactions. In other words, with a simple market mechanism the Bitcoin protocol eliminates top-down, subjective judgment of what is good, bad, legitimate, or illegitimate and replaces it with what is valuable and what is not valuable.
Effect on Third-party Intermediaries & Security: The majority of us depend on a bank, or some type of entity (e.g. Cash App) in order to transact with each other. Bitcoin eliminates the need for such third-party transaction verification. The network itself, through blockchain/distributed-ledger technology and cryptography, verifies the validity of every transaction without a third party ever being involved. This is called the peer-to-peer architecture and it is possible in the Bitcoin network because every participant speaks the network protocol on the same level, meaning that every participant is equal in the eyes of the network. Because there are no third parties involved, individual A can send Bitcoin to individual B directly. All individual A needs to know is the public key corresponding to Individual B’s Bitcoin wallet. Basically, a public key is an identifier of 26-35 alphanumeric characters. Every public key generated in the system generates a corresponding and unique private key, which only the owner of the Bitcoin wallet knows (this is why it is good practice to never share your private key with anyone). Once Individual A sends Bitcoin to Individual B, cryptography takes over and verifies that the public key matches the private key and the transaction is completed. Once verified and completed the transaction is forever recorded on the blockchain. With his private key Individual B is now the only person with access to the Bitcoins in his Bitcoin wallet.
These are just some of the potential uses and key characteristics of Bitcoin, and while they come with certain risks, so has every other revolutionary invention in recent memory – the car, electricity, computers, etc. Based on everything discussed above and much more, I believe Bitcoin is not just the internet of money, but the future of money, and I hope the legal community takes advantage of the opportunity at hand and embraces its viability.