Nº 9 2013 > Technology Watch
The mobile money revolution
Bitcoin: Mirage or future gold standard?
Bitcoin is a digital virtual currency that lets you send money to anyone online, anywhere in the world at very low transaction fees. It is created and transacted by cryptography, rather than by financial institutions. And it is not controlled by any bank or government.
Bitcoin was devised by Satoshi Nakamoto (a pseudonym for one or more people) and became operational in 2009. It is based on sophisticated mathematical schemes for encryption and digital signatures to protect against counterfeiting. All over the world people are now trading hundreds of thousands of dollars’ worth of bitcoins every day with no middle man and no credit card companies. A satoshi (0.00000001 bitcoin) is the smallest amount that can be handled in a transaction.
This article looks into the future of bitcoins and is based on “The Mobile Money Revolution. Part 2: Financial Inclusion Enabler,” a Technology Watch report published by ITU’s Telecommunication Standardization Sector (ITU–T).
What is it?
Like gold, bitcoins are “mined” and can be bought on Bitcoin Exchanges. The bitcoin network is made up of users with computers that can generate the currency — the process known as “mining” — by undertaking what The Economist characterizes as “difficult number-crunching tasks”. Bitcoin is created from open-source software.
There were about 11 million bitcoins in circulation in April 2013, and the maximum that can be generated is 21 million. Currently, 25 bitcoins are generated every 10 minutes but the rate of creating them is slowing — roughly halving every four years. Although 99 per cent of all bitcoins will have been created by 2032, it will take until 2140 to reach 100 per cent. The supply of bitcoins closely resembles the supply of gold over time. But as Bloomberg Businessweek points out, “A bitcoin’s not so much a thing as an understanding”.
What is it worth?
The value of an individual bitcoin, which was just USD 20 at the beginning of February 2013, hit record highs above USD 250, before falling abruptly to below USD 150 in April.
The enormous rise in value of the currency since its inception is linked to what some economists say is its biggest problem: that the supply increases only at the rate that is coded into the system. This is in contrast to regular paper currency, where supply is managed by a central bank and controlled so that it increases slightly faster than the growth of the economy. This means that the value of the currency falls slightly every year, in the phenomenon known as inflation. A bitcoin economy — like an economy that uses gold as its currency — is deflationary. According to Bloomberg Businessweek, “Bitcoin is a hedge against the entire global currency system”.
Secure and safe?
Bitcoin transactions are authenticated cryptographically and cannot be reversed, so there is no need to restrict access to the network. There is no risk in accepting payments from complete strangers, so people do not need anyone’s permission or trust to go into business as a bitcoin-based merchant or financial intermediary. But, as The Economist points out, “The complexity and opacity of the system means that it also appeals to those with more nefarious purposes in mind, such as money laundering or paying for illegal drugs”.
A user must have a bitcoin address, which is a randomly generated string of 27–34 letters and numbers, and which is initially associated with zero bitcoins. People can use the bitcoin address to protect their anonymity when making a transaction, because there is no registry of these addresses. The addresses are kept in bitcoin wallets, which operate like bank accounts. But if the data are lost, the bitcoins are gone too.
A transaction shows both the source and destination address as well as the amount, and is signed by the source address’s private key. All active clients on the network are informed of the transaction.
Security, fraud prevention and regulatory concerns arise in the bitcoin context, and it remains unclear how these will influence people’s views about using a currency that is not backed by a government.
Using bitcoin on a mobile phone is an exciting prospect, and perhaps the standardization of the bitcoin wallet and protocol, as well as bitcoin transactions and mining, would reassure people that bitcoin is as good as gold. ITU–T Study Group 17 could investigate bitcoin security in the future.
“The Mobile Money Revolution. Part 2: Financial Inclusion Enabler,” is a Technology Watch report published by ITU–T in May 2013. Technology Watch reports assess new technologies with regard to existing standards inside and outside ITU–T and their likely impact on future standardization. This report, along with other Technology Watch reports, can be found at http://www.itu.int/techwatch.