The bitcoin saga has it all: Money! Crime! Hackers! A mysterious founder! A fortune’s worth of the Internet-based currency lost and then suddenly found again (or some of it, at least)! It’s an absolute circus. But the real story here is not so much bitcoin itself, but the demonstration that such a system can even be devised. And that makes it more than a currency—it’s a portent of upheavals to come.
Bitcoin is beloved by its fans because it offers a way to transfer cash without going through a bank or a central authority. Rather than wiring sums from one account to the next, people can trade bitcoins as directly as they might swap a suitcase of polymer $20s. Transactions are anonymous, direct and non-reversible, in a way that appeals to libertarians, troublemakers, criminals and people who don’t like paying bank fees (which, on the whole, is pretty much all of us).
And if you lose the cryptographic keys to your bitcoins, they’re gone for good. (Late last year came the story of a Welshman who accidentally threw out a hard drive containing roughly $7.5-million worth of the things and was left rummaging in vain through a garbage dump outside Newport.)
Now, here’s the important part: The record of who owns which bitcoins doesn’t sit in a digital account on a central server, humming away in a private corporate data centre. In fact, there’s no bitcoin corporation to speak of. Instead, the ledger of bitcoin activities is shared among computers around the world, all running the same free software, secured not by armed guards, but by an ingenious cryptographic system that keeps them all synchronized.
Every time a bitcoin transaction is made, computers around the world have to confirm it by grinding out the answer to an ever-changing mathematical puzzle that the currency’s creators programmed into the system. The puzzle is essentially a digital make-work project, there to dissuade fraudsters from hijacking the network with phony confirmations. (On average, it takes about 10 minutes to confirm a bitcoin transaction.) And in return for grinding through these puzzles, computer owners around the world are rewarded with a sort of commission—in the form of new bitcoins.
Whatever else we make of bitcoin as a financial instrument—and there are plenty of skeptics who accuse it of everything from instability to faddishness—this system alone, which bitcoin junkies describe as a “blockchain,” is an enormous achievement. It’s even a bit mind-boggling, if you think about it: Bitcoin’s creators have come up with a monetary system that, so far, has proven as secure as the world’s banks, but without the banks. (While it’s true that some bitcoin exchanges have been hacked, that doesn’t mean the currency itself has been compromised, any more than stealing someone’s wallet compromises paper currency the way, say, printing fake money would.)
This has led technologists to the next logical question: If we’ve figured out a way to reliably exchange hard currency without a bank, what’s to stop us from using bitcoin’s amazing distributed cryptographic system to exchange other things, minus the middlemen and regulators, too? Enthusiasts are already drawing up lists. Blockchain-based systems could be used to securely transfer financial instruments. But why stop there? Distributed systems could be used to transfer notarized deeds, signed contracts, rights to digital media, or evenshares in a company, from one person to another. It could even be possible to transfer control of real-world objects back and forth between people—especially if those objects were physically tied into the global network. Imagine, for instance, an Internet-enabled car whose engine won’t start unless it receives the proper cryptographic signal—as transferred over a bitcoin-style network that, instead of trading units of currency, trades ownership of cars.
One such network, called Colored Coins—run partly by University of Waterloo computer science student Vitalik Buterin, who first started mining for bitcoins in 2011—is promising a trade in stock, bonds and commodities that bypasses the “small number of heavily regulated exchanges” that make trading “difficult and expensive,” according to the website.
It’s possible that none of these applications will be enticing enough to lure consumers away from the bank-based status quo, which seems to be working well enough for the purposes of shunting money around the globe. Bitcoin itself could be the kind of thing we read about more than ever actually use. Or itcould emerge from the anti-establishment underworld and be folded into the regulated mainstream. In late March, the U.S. Internal Revenue Service finally took a position on bitcoin, declaring that it would be taxed as property, not currency, and imposing significant record-keeping requirements on its use.
But the rise of trading networks based on the principles of bitcoin threatens to throw a wrench into the idea that the state can regulate finance by keeping tabs on its gatekeepers and all the regulatory frameworks that go with it. Governments like central clearinghouses just as much as they dislike back channels; gatekeepers give them something central to regulate. For decades, the decentralizing forces of global networks have been see-sawing back and forth with the entrenched powers of statehood. Blockchain-based trading networks won’t be the long-prophesied death of the nation-state. But the Internet has upped the ante once again.