PALM DESERT, Calif–Bitcoin is going to be even more transformational globally than the Internet, according to one expert, who believes credit unions are positioned to benefit even more than big banks if they just leverage the advantage.
Brock Pierce, the chairman of the Bitcoin Foundation, a trade association, and founder and managing partner of Blockchain Capital, a venture capital firm that invests in blockchain technologies, noted that the amount of investment being made in the underlying technologies of digital currency exceed any other category for VC funds, and predicted that within two years the fruit of all that investment will be in the market and market penetration and acceptance will skyrocket.
He said that major banks are already investing and urged credit unions to get up to speed on Bitcoin, blockchain and digital currency.
One reason many have stayed on the sidelines, including credit unions, is just that issue–not understanding how digital currency works.
“What is Bitcoin?” he asked. “It’s a difficult concept to teach.”
The term Bitcoin, he said, is used to refer to three things:
- The underlying technology concept/platform
- The protocol for using this technology platform
- The currency for transactions using this protocol
All of that is built upon blockchain technology, which is the underlying platform and includes a decentralized digital transaction ledger that is critical to the success and soundness of digital currency.
The Bitcoin blockchain, he explained, is a transaction system to move value between parties without third-party interaction.
“The combination of BitTorrent technology, or peer file sharing, and public key cryptography are the solutions to long standing cryptography problems,” said Pierce.
The Double-Spend Problem–Solved
One of those problems, perhaps its largest, has been the “double-spend problem” that is also sometimes referred to as the “Byzantine General problem.” In the case of Bitcoin, the early challenge and dilemma was a payment system based on unreliable information; that is that the same Bitcoin might be spent by two different people, making it worthless to one party involved and eroding any faith in the system.
Pierce said that challenge has now been overcome to the point where every Bitcoin transaction is completely trustworthy due to the open source software on which the system is built and the decentralized database/ledger that is core to everything.
“It’s a giant interactive Google doc spreadsheet that anyone can view and administrators, also known as miners, continually verify and update to confirm that each transaction is valid,” said Pierce. “It’s a secure network where any transaction can be independently confirmed as unique. So it’s a ledger that instead of being managed by one party is constantly managed by millions of people.”
The public ledger of past transactions is the blockchain. “It confirms to the rest of the network that unique transactions have taken place,” he said. “Bitcoin nodes use the blockchain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere. It is intentionally designed to be resource-intensive.”
Bigger Than Just Currencies
Pierce said anyone who thinks of Bitcoin as simply about exchanging funds is thinking far too narrowly.
“This is applicable to anything. Any currency. Any financial asset. Any financial instrument. Any title,” he said. “The Internet today is the Internet of information. Bitcoin is the Internet of value.”
But how does a consumer use it? Pierce said the consumer simply downloads a software wallet app, such as that available through Blockchain.info, and the person can then transfer Bitcoin via a QR code/public key address.
As a currency, Pierce acknowledged there is little economic argument for most Americans. It is the five billion people in the world without access to banking, financial services and credit services where the currency potential can be found, he said.
“The remittances market is a $4-trillion in global market, with 5% to 30% transaction fees. The vendor payments market has 1%-3% transaction fees,” Pierce said. “The developing world is going to be built on this type of technology.”
In addition, he noted that micro-transactions on the Internet are not really practical. But it’s an area in which Pierce said he has been investing. “This idea of sending a penny to someone, or a dollar—these small transactions come with fees that make them cost-prohibitive right now.” While those amounts are small, he said micro-payments of that size are frequent in developing countries.
Another plus, he added: settlements are very fast, usually within 10 minutes, which appeals to younger consumers.
The Size of the Market
Pierce said the Bitcoin market is currently valued around $6 billion. Bitcoins, which can fluctuate in value, were trading at $391.94 at the time of his presentation.
“The price may go up and down, but the actual use of the technology continues to increase, he said. “Almost every (Bitcoin) company that has a strong management team is seeing 10% to 40% month-over-month growth.”
Pierce said the forecast is that by the end of 2015 there will be approximately 12 million consumers with Bitcoin wallets. Big retailers have taken notice, and those that accept Bitcoin for payment include PayPal, Re/Max, Tiger Direct, Virgin Galactic, Expedia and Microsoft. “They are paying 100 BPs, tops, for transactions. There are zero charge-backs. As of today, all purchases are final. There will be 120,000 merchants around world accepting Bitcoin directly by end of 2015.
Pierce said the amount of software being written for Bitcoin transactions dwarfs any other category.
“A lot of people today, including the media, misunderstand Bitcoin,” said Pierce. “They think it’s fringe users using it for nefarious reasons. It’s the same things that were said about the Internet early on. One of the big misconceptions is that the technology is anonymous. It’s anything but anonymous. Every transaction that has ever taken place in Bitcoin is visible forever. It’s permanently listed there in a public ledger that millions of people monitor. The privacy is in the Bitcoin wallet.”
Pierce said he believes every government in the world will eventually issue its currency in a blockchain, with everyone carrying their currency in their phones.
But, again, Pierce said, blockchain technologies are going to enable much more than just currency exchange.
“When I buy a car I still get a pink slip, and that seems a little strange to me in this day and age. Title insurance is another one of those. It will be public information, with privacy around the entities. Eventually, all assets will ride on this technology, including identity. There has never been a counterfeit Bitcoin, and there never will be. Voting can run on this kind of technology, so there will never be voter fraud. There is a long list of use cases.”
What Credit Unions Need to Understand
Credit unions need to understand where there are other opportunities to take advantage of blockchain, he said.
“The middle and back office has seen very little innovation in the last 50 years,” said Pierce. “The large banks have figured out that by using this technology they can cut their costs drastically. I think this is where it’s more relevant to credit unions than it is to even big banks. I’m assuming you have an even greater need to cut costs. There are huge opportunities here for you. In theory, you should be the most nimble. This is the death of paper. This technology is going to let us move away from paper. You will be able to streamline and reduce your costs. Because you are smaller than the biggest banks, this should be an easier thing for you to do. The companies are there to help you do this with software solutions that will speed settlement and create new revenue opportunities, as well.”