Digital Currencies to Provide TransparencyTue, 03/21/2017 - 09:58
In 2014, in a good month, the number of bitcoin transactions on exchange platform Bitso amounted to MX$4 million. In 2017, MX$4 million represents a slow day. Bitso, which aims to connect Mexico with the world of digital currencies such as bitcoin and ethereum, now oversees daily bitcoin transactions that usually range between MX$4 million and MX$15 million.
Daniel Vogel, President of Bitso, is convinced it has not even scratched the surface of the digital currencies’ potential in Mexico. “The use of digital currencies will increase competition, lower transaction costs and completely change our paradigm regarding the way we interact with the suppliers of financial services.”
One of bitcoin’s most unsettling elements for many is that it is not backed by any central authority, bank or institution,“the issuance of new bitcoins is controlled in code. It is not arbitrary and cannot be changed by any individual. We know exactly how many bitcoins are in circulation and how many will be circulating in a particular moment,” says Vogel.
Unlike common currency, which is printed or coined by federal governments, bitcoins are created through a process called mining, which is solving math problems. “All the computers connected to the bitcoin network solve equations. Whenever an equation is solved, a block referencing the previous one is created,” says Vogel. “Whenever I make a transaction with bitcoins, it is registered in the blockchain and every computer running the software registers the transaction. Every 10 minutes the bitcoin network is updated and transfers this information to the computers running the software.”
The intricate system connecting computers and updating the blockchain makes it almost impossible to alter bitcoin. “If you want to alter any bitcoin transaction, it would be necessary to convince all the anonymous computers running the software to change the blockchain,” explains Vogel. He says bitcoin must be understood as a protocol. “Just like the internet is a protocol, so is the bitcoin network. Being an open system allows for important innovation opportunities.”
Vogel is convinced the most important innovation opportunity for bitcoin and other digital currencies lies with microtransactions. “In the future, you might use bitcoins to skip adds on YouTube or instead of subscribing to a newspaper you will pay fractions of bitcoins to read only the articles you want to read.”
Traditional retail would be the go-to option for normalizing the use of digital currencies but Vogel believes the currency offers more interesting opportunities. “Peer-to-peer lending platforms have existed for a long time but they tend to be local. Now, we are seeing people experiment with bitcoin peer-to-peer lending globally,” continues Vogel.
But not everything everything about bitcoin is sorted out. Two issues are front and center: the lack of regulation and the use of the currency for illegal activities. Since it is not backed by any institution, it has no regulatory oversight. However, that does not mean that governments have not made an effort to give it an operational framework. In April 2017, the government of Japan recognized bitcoin as a legal payment method, which has sent the value of the digital currency soaring, experts say. The EU and the US treat it as a currency but have imposed a series of regulations that tax any income that people might get from it.
Other common concern is bitcoin’s anonymity and thus its use for illegal activities. Though every bitcoin transaction is registered in the blockchain and thus is traceable, users can choose whether their name is revealed or not. That sort of anonymity was taken advantage of in the global cyberattack that took place in May 2017, when payments were demanded in bitcoins. But Vogel says that those who use bitcoins for illegal activities have no understanding of the technology and that never in history has there been such traceability and visibility in the monetary system.
Despite the hurdles, Vogel is confident that the benefits the currency could offer surpass its perils. “In the same way that in the 1990s people could not understand the role the internet would have in the monetary system, people do not entirely get what bitcoin will do for them in the coming years,” Vogel says.