By Michael J. Casey
Bitcoin prices have dropped almost 60% since January, outpacing
the Russian ruble. Critics say that's proof digital currency has
failed.
Ignore them. Bitcoin's price is irrelevant to the key question
of whether the underlying technology will disrupt finance. There
are many signs it will.
Bitcoin is much more than just a currency. Investors from
Silicon Valley to Wall Street are now pouring money and expertise
into what they view as an adaptable technology platform. Software
developers anywhere can use bitcoin's open-source code to create
specialized applications that let businesses undertake commercial
exchanges without using middlemen. These applications threaten to
make redundant many services provided by banks, foreign-exchange
houses, escrow agents, clearing houses, notaries public and even
lawyers.
Of course, none of that guarantees that bitcoin will succeed.
Detractors will rightly argue that householders won't save or
transact in a unit of exchange whose value fluctuates wildly.
Indeed, while bitcoin transactions continue to rise, and even
though a growing list of merchants accepting bitcoin now includes
Microsoft, Expedia and Dish Network, digital currency's portion of
global commerce remains minuscule.
But it doesn't matter that mom and pop aren't comfortable with
bitcoin. What matters is whether the exploding software innovation
around cryptocurrency leads to solutions that allow corporations
and governments to derive benefits while protecting themselves from
risks, including the volatility. The vision that many in Silicon
Valley have is that bitcoin, or perhaps some clone of it, will work
in the background of the global economy. Mom and pop won't even
know it's there.
Balaji Srinivasan, a partner at venture-capital firm Andreessen
Horowitz in Menlo Park, Calif., likens bitcoin's current status to
the early days of Linux, whose open-source operating system
initially sought to compete with Microsoft's Windows on personal
computers but eventually became the leading operating system for
enterprise servers. Much like some bitcoin evangelists' views of
fiat currencies, early Linux supporters "were overconfidently
saying, 'We are going to kill Microsoft,' and yet while it never
got a much of a presence on desktops, it did gain a presence on the
server side," Mr. Srinivasan said. "Now, 15 years later, the
Internet as we know it wouldn't exist without Linux."
Mr. Srinivasan talks of how a "dual boot" of Linux and Windows
became popular as techies simultaneously tapped the best functions
of both. It's analogous, he says, to how cryptocurrency developers
are making their applications "interoperable" with traditional
monetary systems. Bitcoin, with its more efficient, direct and
cheaper system of exchange, would support payments and transfers
over the Internet and then connect seamlessly with the offline
economy, where the dollar and other traditional currencies
continued to reign.
Mr. Srinivasan's firm, which was co-founded by Netscape pioneer
Marc Andreessen, is one of dozens that have invested a total $311
million in bitcoin startups this year, according to a tally by news
site Coindesk. That's up from $93 million in 2013. The names behind
these deals read like a who's who of Internet history: Tim Draper
of the Valley's legendary Draper family, Reid Hoffman of LinkedIn
fame, Yahoo founder Jerry Yang and many others.
What gets these people excited is bitcoin's "decentralized"
infrastructure: the public, distributed ledger known as the
blockchain, which is updated and maintained in real time by a
network of independent computers to generate an ongoing consensus
on the veracity of its data.
These computers are known as miners. While the new bitcoins they
earn in return for maintaining the blockchain ledger can be
metaphorically likened to freshly mined gold, the miners' real work
is to authenticate information. This vital role allows people and
businesses that have no other way to trust each other to engage in
commerce without the expensive intermediation of a third-party
institution. It's the first case of "decentralized trust" to
challenge the hub-and-spokes "centralized" structure of
international finance that was forged during the Renaissance by
Florence's Medici family.
Bitcoin's fast, low-cost system for authenticating information
not only makes it possible to make payments without fees going to
credit card companies, banks, payment processors or exchange
houses, but also to decentralize many other economic functions.
Since any information can be embedded into the blockchain ledger
and because the core software is an open platform, startups are
building myriad "Bitcoin 2.0" applications based on the same
principle: blockchain-based ride-sharing services, personal ID
systems, database management and asset registries, even the wild
idea of companies run not by human managers but by software
programs.
Wall Street is in on the act, too. Senior investment bank
managers are joining bitcoin startups. Hedge funds are trading
digital currencies. Ex-traders are building high-tech platforms and
derivatives to better manage digital currency's volatility.
Bitcoin's price is now quoted on Bloomberg terminals. Some banks
are using Ripple Labs' cryptocurrency network for international
transfers. Some Federal Reserve district banks are looking at how
the technology might streamline the Fed's interbank payments
system.
Meanwhile, the British, Mexican and other governments are
studying blockchain solutions to enhance economic transparency.
Excessive government regulation could also strangle
cryptocurrency, of course. But smart regulation could legitimize
it. Last week, New York Superintendent of Financial Services
Benjamin Lawsky unveiled details for a revised "BitLicense" that
was welcomed by many in the bitcoin community for promoting
innovation.
These are the developments that matter, not the roller coaster
of bitcoin's price.
Write to Michael J. Casey at michael.j.casey@wsj.com
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