Bitcoin may survive

By Chang Se-moon

A June 2, 2016, article in USA Today reports the rising value of Bitcoin value as the Chinese yuan falls, suggesting that this may be a good time to visit Bitcoin again to see what it is all about. My review is based on the 2016 report titled “Bitcoin: A Primer for Policymakers” by Jerry Brito and Andrea Castillo of the Mercatus Center at George Mason University, Virginia.

According to the authors, “Bitcoin is an exciting innovation that has the potential to greatly improve human welfare and jumpstart beneficial and potentially revolutionary developments in payments, communications, and business.”

As an example, the authors cite the use of credit card payments that put businesses on the hook for chargeback fraud. “Merchants have long been plagued by fraudulent chargebacks or consumer-initiated payment reversals based on a false claim that a product has not been delivered,” they wrote. Merchants in this case can lose the payment for the item as well as the item itself, and also have to pay a fee for the chargeback.

Since payments by Bitcoin cannot be reversed, merchants can be protected from consumer chargeback fraud. Consumers who want the protection of using a credit card can continue to do so, but they have to pay more.

What is Bitcoin? Let me try to explain by heavily quoting from the study by Brito and Castillo.

“Until Bitcoin’s invention in 2008 by the unidentified programmer known as Satoshi Nakamoto, online transactions always required a trusted third-party intermediary.” If parents want to send $100 to their daughter far away from home, the parents have to rely on a credit card or bank that will subtract the amount from the parents’ account and add the same amount to their daughter’s account.

Now consider digital money. If the parents send an email attaching the digital money to their daughter, they still have a copy that they can spend even after they send the money. “In computer science, this is known as the double-spending problem,” which “could only be solved by employing a trusted ledger-keeping third party.”

Bitcoin solves the double-spending problem without a third party by distributing the necessary ledger among all the users of the system through a peer-to-peer network. “Every transaction that occurs in the Bitcoin economy is registered in a publicly distributed ledger, which is called the blockchain.” Blockchain ensures that the same Bitcoins cannot be spent again. How could that be?

Bitcoin transactions are verified and secured through the use of public key cryptography. “Public key cryptography requires that each user be assigned two keys, one private key that is kept secret like a password, and one public key that can be shared with the world. The public key is often referred to as a Bitcoin address.”

When parents transfer Bitcoins to their daughter by signing with their private key, they create “a message, called a transaction,” which contains their daughter’s public key. By looking at the parents’ public key, anyone can verify that the transaction was indeed signed with their private key, and that it is an authentic exchange. The transaction and the transfer of ownership of the Bitcoins are now recorded, and “displayed in one block of the blockchain. Public key cryptography ensures that all computers in the network have a constantly updated and verified record of all transactions within the Bitcoin network.”

The question then relates to how in the world new Bitcoins are created and introduced into the money supply. This is the technical part beyond my comprehension. The authors state that “The actual mining of Bitcoins is by a purely mathematical process.” Let us accept this and move on.

What are the benefits of using Bitcoins?

First of all, the cost of doing business is lower by use of Bitcoins than credit cards. “Since Bitcoin facilitates direct transactions without a third party, it removes costly charges that accompany credit card transactions.”

Secondly, Bitcoin has the potential to improve the quality of life for the world’s poorest by improving access to basic financial services, and to assist charities through Bitcoin’s ease and affordability for transferring funds. For example, “Sean’s Outpost, a homeless-outreach organization located in Pensacola, Florida, has been providing meals and toiletries to Pensacola’s neediest solely with Bitcoins. The charity’s founder, Jason King, has opened a nine-acre homeless sanctuary, fittingly titled Satoshi Forest, which is paid for entirely with donations of Bitcoins.”

Finally, Bitcoin can be a platform for financial and technical innovation. “The Bitcoin protocol contains the digital blueprints for a number of useful financial and legal services that programmers can easily develop. Since Bitcoins are, at their core, simply packets of data, they can be used to transfer not only currencies but also stocks, bets, and sensitive information.” Brito and Castillo cite numerous innovations that are already in progress based on use of Bitcoin technology.

You can Google and download this excellent study for free.

Chang Se-moon is the director of the Gulf Coast Center for Impact Studies. Write to him at: changsemoon@yahoo.com.