Bitcoin – The Big Innovation

Cryptographic currencies like Bitcoin represent a new era of digital transactions – with enormous innovation potential.

“Personal computers in 1975, the Internet in 1993, and – I believe – Bitcoin in 2014”: This is how Marc Andreessen, developer of one of the first web browsers, formulated his assessment of the future significance of virtual currencies, especially Bitcoin. After the computer revolutionized the home and work world and the Internet connected billions of people, a universal platform is now emerging with decentralized, cryptographic currencies, on which economic transactions can be carried out cost-effectively, worldwide and within a few minutes.

The advantages of such a payment system are obvious: It can be used worldwide at any time, regardless of national borders – provided an Internet connection and the appropriate software. Decentralisation ensures that transactions cannot be censored. WikiLeaks, for example, began accepting donations in Bitcoin after centralized payment systems such as Visa and PayPal no longer wanted to cooperate with the organization. With fees of just a few cents per transaction, Bitcoin is particularly suitable for international bank transfers, provided the recipient has the option of exchanging Bitcoin back into real currency.

In the future, virtual currencies could function as universal platforms on which innovative financial products could be built. Companies would then use Bitcoin less as a pure means of payment and more as a reserve currency for innovative payment systems. In addition, the technology underlying Bitcoin also offers great innovation potential in general due to its diverse applications.

Source code of the trust

But first the question arises: What exactly is Bitcoin and how does it work? Bitcoin is a type of digital cash that can be used decentrally and without the need for previously known identities – a decentralized system without a central bank, in which users can only spend the money they actually own. Bitcoin replaces trust in financial contracts with trust in an open source program code that is executed in a decentralized network of computers. To be able to verify the correctness of transactions, the complete transaction history is publicly available. Since there is no central instance that decides which transactions are valid and which are not, the system carries out regular reconciliations.

Since identities are too easy to forge online, the computing power consumed is used instead for reconciliation – the so-called proof of work. This means that it would be very expensive for attackers to spend money twice – but it has its price. Researchers estimate that the energy consumed by the entire Bitcoin network is about 20 percent of the power of a modern nuclear power plant – and the trend is rising.
Legal grey areas

The legal situation of Bitcoin is far from clear, as the globally usable system is subject to various national legal systems. Although this is also the case for traditional payment services, many existing regulations are not applicable to the system due to the novelty of Bitcoin. The consequence is a high degree of legal uncertainty, which discourages many companies from offering innovative Bitcoin services. Although the European Court of Justice recently denied the long disputed obligation to pay VAT on the exchange of Bitcoins, there is still a need for clarification in many other places:

How should contracts for Bitcoin services such as webwallets, exchanges or payment services be classified?
Who is liable in the event of losses?
What can the providers effectively agree in the General Terms and Conditions (GTC)?

In order not to expose themselves to the suspicion of money laundering, companies shy away from using Bitcoin as a means of payment. In addition, companies can accept Bitcoins via specialized payment services without holding them themselves, but at a high price: Often the local currency is first exchanged for Bitcoin and then exchanged back into the local currency at the recipient’s end – due to the fees incurred for this, a transfer via Bitcoin is often more expensive than via traditional payment systems.

Growing ecosystem

Nevertheless, companies should not shy away from a discussion of Bitcoin and the technologies behind it. The open, globally available block chain opens up a universal interface for financial transactions, especially in the context of the Internet of Things. The script language integrated in Bitcoin allows financial contracts to be specified which, unlike traditional contracts, cannot be enforced by trusting institutions and, if necessary, by legal action, but only autonomously in the system. And a growing ecosystem, funded by millions of venture capital, ensures continuous improvements in protocol and usability. It is therefore probably only a matter of time before the biggest legal and technical hurdles are overcome.

Biotope for digital innovation

Bitcoin is thus increasingly becoming a biotope for digital innovations. Already today, developers and scientists are working on concepts that, based on Bitcoin, enable immediate transactions via a network of payment flows between computers. So-called “Colored Coins” allow Bitcoin to be used to transfer ownership rights to valuable objects from the real world. Systems parallel to Bitcoin, so-called “sidechains”, make it possible to link the use of alternative virtual currencies to the security of Bitcoin.

They will soon be used to increase liquidity between Bitcoin exchanges. The decentralized block chain technology of the Bitcoin system also produces further innovations, such as the “smart contracting” platform Ethereum on which almost any financial contract can be represented by computer programs. The technology on which Bitcoin is based is a fundamental breakthrough that enables a completely new way of conducting transactions and could thus change the networked society forever.

Even if Bitcoin does not become established as a payment system: The decentralized block chain technology will change the virtual and real world, because the innovation potential of virtual currencies extends far beyond that of traditional payment systems. The vision of Bitcoin as an infrastructure for a new generation of financial systems could come true in the near future.