When Bitcoin, a math-based open-source cryptocurrency inside a P2P network, first came into existence in 2009, it was limited to digital realms inhabited by libertarian-minded geeks trading anonymously on the Internet. The concept was introduced in 2008 in a cryptography e-mail list by a programmer who goes under the alias of Satoshi Nakamoto. He still prefers to be anonymous, but his concept, and the software he released the subsequent year, has taken the world by storm.
At its core, the system consists of a peer-to-peer network of Bitcoin clients. Each user has a pair of unique mathematically linked keys. One key is public (think of it as your Paypal email to which others can send money). The other key is private and locked inside your computer, and the software only uses it in combination with the public key to help you and the other party transfer Bitcoin. Once a transaction is verified, the results are sent across the P2P network so that all the Bitcoin clients can verify it and add the updated data to the public transaction log. Bitcoins are stored in wallets integrated with the client for securely sending and receiving bitcoins. The P2P network keeps track of the transactions, and the software is already set to issue new bitcoins in a systematic manner.
Fast forward five years ahead, and you now have the federal government of the United States meeting with the Bitcoin Foundation to decide whether this cryptocurrency can become a part of the global financial system. It’s not just a matter for Bitcoin proponents and opponents, because what regulators decide in the U.S. is going to have a huge ripple effect.
Small businesses and startups that plan on using Bitcoin would end up forced to move their operations and registration to countries that have accepted Bitcoin, and these countries would enjoy the resulting investments, VC funding, taxes and jobs. The five-member panel of the Bitcoin Foundation met with representatives from the Treasury Department, IRS, FBI, Homeland Security and other federal agencies concerned with national security and international finance. But the key to the whole thing may lie with the U.S. Federal Election Commission (FEC), which is considering whether to allow political candidates and outside groups to accept Bitcoin contributions.
Regardless of what the U.S. government decides, Bitcoin has already gained critical momentum in the private industry, attracting both VC funds and a flood of positive media coverage. Not to mention a booming ecosystem with Bitcoin startups growing like weeds, offering all kinds of services and products that facilitate Bitcoin usage and transactions.
The Winklevoss Twins added to the hype earlier this year by leading a seed funding round for Bitcoin payment processing firm BitInstant. The twins also announced ownership of one percent of all Bitcoins in circulation, and filed with the SEC for a $20 million IPO to set up an exchange-traded fund (ETF) for Bitcoin so that it could be traded like commodities and stocks.
TechCrunch Disrupt has now scheduled a panel discussion on the future of math-based currencies. Apart from the Winklevoss Twins, panelists include Balaji S. Srinivasan, co-founder of Counsyl; and Naval Ravikant, founder of Angellist.
A lot of the recent publicity has to do with the celebrity halo of the Winklevoss Twins. There’s also a certain amount of notoriety, considering the financial woes of Tokyo-based Mt. Gox, the world’s biggest Bitcoin Exchange. Mt. Gox found about $5 million worth of its dollar assets frozen and seized a couple of months back because it had not registered as a U.S. money transmitting service, something the company has since done to renew its U.S. operations.
A look at the numbers (as of Sept 5, 2013) tells you why regulators are worried:-
- Number of Bitcoins in Existence – 11,655,475
- Exchange Rate (source: Bitpay) – 1 Bitcoin = $121.5204
- Number of Bitcoin Exchanges – More than 50
- Number of Bitcoin Trades/Day – 64,000
- Market Cap – More than $400 million
This also shows that Bitcoin is a lot bigger and a global phenomenon that transcends personalities or a single company in trouble in the U.S. At a commercial level, Bitcoin is on a tear, picking up merchants and support from critical organizations. WordPress now accepts Bitcoin as payment for digital goods in partnership with payment processor Bitpay. Reddit also allows use of Bitcoins through a partnership with Coinbase. Namecheap allows domain purchases to be made using Bitcoin. The Silicon Valley Bank supports the Mt. Gox-CoinLab partnership to enable currency conversion between dollars and Bitcoin in the U.S.
Bitcoin’s growth is eerily similar to Paypal’s arc as a revolutionary payment processing service that allowed people to send each other hard money through email, bypassing the credit card companies. Bitcoin is now taking it a step further by allowing people to pay each other directly, with no one else in between. Paypal is now virtually indispensable for any online merchant, and it looks like Bitcoin is going down the same road.