Global Challenges, Opportunities Of Cryptocurrencies Such As Bitcoins

Bitcoin and other cryptocurrencies could compete with national currencies in the long term, but still face many challenges, according to panellists at a recent event in Geneva. Furthermore, the blockchain technology – the open source software which underpins those cryptocurrencies – could have innovative applications in other sectors, including intellectual property protection, they said.

Cryptocurrencies have raised questions in terms of security and protection of transactions, but little is known about what they really are. Setting out from this premise, the Geneva Internet Platform (GIP) held a discussion on 13 June “on more pressing issues related to digital currencies,” as explained in the event presentation.

How Cryptocurrencies Work

Bitcoins as a currency is a system of token exchange via a peer-to-peer network, according to Mathieu Buffenoir and Alexis Roussel of the Swiss Bitcoin association. With such a system, it is possible to transfer money without the intervention of a third party.

Bitcoin tokens are exchanged through a “wallet software,” containing two keys, encoded in quick response (QR) codes. A public key is used to receive funds and a private key allows the owner to transfer tokens.

Today, there are roughly 13 million bitcoins circulating on the 21 million bitcoin limit decided by the developers, said Chiara von Gulter of the Z/Yen group, a commercial think tank. The bitcoin market capitalisation is about US$ 8 billion, albeit fluctuating.

“It is a 100 percent transparent system,” Roussel said, as all transactions are written in a publicly available ledger, named the blockchain. Verifications of transactions are decentralised, with users called “miners” doing it and being compensated with bitcoins.

As the blockchain technology which underpins bitcoin is open source, other cryptocurrencies have been developed, and there are now over 50 identified cryptocurrencies, named altcoins (for alternative coins), von Gulter said.

Advantages of Digital Currencies

Digital currency transfers don’t need a third party to realise the transaction, von Gulter said, making bitcoins as a medium of exchange fairly attractive, with transaction fees lower than credit card providers.

This technology is attractive for money exchanges, in particular micropayments, Roussel said. It could be useful for people who don’t have a bank account and are using phone-to-phone cash transfer, for instance.

But bitcoins can also be used in the digital world. “The bitcoin, by its simplicity, by just showing a string of characters or one QR code, can be integrated into all the applications that we have online. It is quite fit to the online economy,” Roussel said.

Other Applications of Bitcoins and the Blockchain

Bitcoins are more than a currency, Roussel explained, giving the example of smart contracts as another use. When sending tokens with a message, it is possible to send a whole programme that will execute by itself in time, he said. Some contract clauses need to be executed in time by a lawyer, but the blockchain will be able to execute these clauses by itself.

As the blockchain technology is open source, people have developed other currencies based on it. One of them, called Namecoin, aims to overcome problems of internet governance and the domain name system (DNS). The concept is to put domain names into the public ledger and have people sending domain names with the cryptocurrency connect this name to an IP address in the blockchain.

“Then we have a system which is decentralised … where you don’t have a register, and [it] is much more resilient than the actual DNS,” Roussel said.

The blockchain technology could have applications in other sectors, especially when there are registries shared across the space, for example in insurance, corporate voting and anti-fraud protection, von Gulter said.

William Taborda, information systems engineer at the United Nations Conference on Trade and Development (UNCTAD), also raised several potential applications of the blockchain technology, for example of intellectual property protection. When you send a document on a blockchain, this information is an encrypted version of your document, he said. As only the person sending the message has the key to decrypt it, this can serve as proof in the future that this person wrote the document.

Challenges for Cryptocurrencies

Notwithstanding the opportunities they could bring, cryptocurrencies face numerous challenges.

For instance, there is a lack of legislation regulating digital currencies and a lack of user and consumer protection, von Gulter said. Recently, bitcoin exchanges were subject to hacking attacks, but and unless there is deposit or investment protection, it is almost impossible to get funds back.

In term of technical security, bitcoin is far better than any other known technology, and the core security issue is to educate people on how to protect its personal data, Taborda said. But clear legislation and insurance protection for users should be put in place, he added.

Mt. Gox, one of the most important bitcoin exchange platforms, collapsed in February and people lost their money. Roussel explained that this service was in fact not connected to the bitcoin network and that two lessons could be learned from it. First, serious actors are needed in the bitcoin world, and second, the bitcoin protocol was never affected. No one bitcoin disappeared, but went into other accounts, it just is not known exactly where, he said.

The volatility of prices also undermines the potential of bitcoins as a currency, von Gulter said. Between January 2013 and November 2013, the bitcoin exchange rate went from US$ 13 to over $1100. Money has generally three core roles: a medium of exchange, a unit of account and a store of value. Bitcoins have shown so far to be a poor unit of account and a poor store of value because of the price volatility, von Gulter said.

Digital currencies could compete with government/fiduciary currencies and over time governments won’t be indifferent to them, von Gulter said. But for now, regulators around the world are neutral or unwelcoming, and critical about altcoins. States have trouble classifying cryptocurrencies, whether these are currencies, token trade, commodities or assets as the United States decided, von Gulter said. This classification has implications for how digital currencies are taxed, she added.

Standards, like those from the International Standards Organisation (ISO) internationally or national standards on how to manage altcoins and cryptocurrencies systems, are important. This is particularly the case for governance, reporting, custody of bitcoins or other cryptocurrency exchange systems, von Gulter said. We have to do this together and bridge gaps in legislation, Taborda said.

Cryptocurrencies are here to stay, said Taborda, so let’s use them for good.

A video of the event and presentations of speakers are available on the GIP website.