Fishman,

ACKNOWLEDGEMENTS
We are

grateful

to

the

many

individuals who shared their time

and expertise throughout the writing
of this report. Carmen Medina
served as the research sponsor for
this

project,

insight,

providing

inspiration,

and

us

with

general

"Yoda-ing." This GovLab project

and paper would not have been
possible without her mentorship.
Special thanks go to Shrupti Shah,
GovLab director, and Bill Eggers,
director of Deloitte Global public
sector

research,

for

advice

throughout the writing process.

Several Deloitte colleagues provided
invaluable feedback at all phases of
our research. We would like to thank
Brien Lorenze, Financial Advisory
Services principal, who early on in
the research process saw promise and
potential in this project. Thank you to
Val Srinivas, head of research for
Deloitte's

Center

for

Financial

Services, and to his staff, Ryan

Zagone and Dennis Dillon, for
collaborating on this emerging topic.
We greatly appreciate the advice and
support of Deloitte's Cryptocurrency
Community of Practice, in particular
Pierre Rochard. Thanks to Tiffany
Contents

Deloitte

Services

LP;

Mark White, Global Consulting

CTO; and Devon Halley, GovLab
manager, for their wisdom and
guidance. Hats off to Vetan Kapoor,
former GovLab fellow, for his
contributions to the project.
We

would

like

individuals

to

thank

whose

the

interviews

informed our research, including

Barry

Silbert,

SecondMarket;

CEO

Miles

of

Kimball,

professor of economics and survey

research at University of Michigan;
Nick Tomaino and the team at
Coinbase; John Collins, senior staff
at

the

Senate

Committee

on

Homeland Security and Government

Affairs;

Rodolfo

Gonzalez,

associate at Foundation Capital; and

the Ethereum team. We also want to
extend a special thank you to Walter
Frick, associate editor at Harvard
Business Review, for providing the
opportunity to contribute to Harvard
Business Review's blog and for
speaking opportunities at Harvard
University.
Lastly, we would like to thank our
GovLab colleagues for creating a
culture of innovationa place that
supported and pushed us to take an
exciting ride with Bitcoin.
Introduction

2 Bitcoin overview

3 Bitcoin: Beyond money

7 Future of

Bitcoin

11 Endnote

INTRODUCTION

ESPITE an explosion in media

will face new challenges, opportunities,

coverage,

virtual

currencies

and

such

Bitcoin

are

mis-

discover new methods for executing its

understood. Every day, news articles

mission as a regulator and law enforcer,

describe

price

while corporations may build upon Bitcoin

volatility, and government crackdowns.

technology to create innovative products

This focus on Bitcoin as a volatile and

and services. In the future, Bitcoin may

even

be

even revolutionize the way we conduct

distracting governments and businesses

business and think about work. The sooner

from its potential long-term significance

the public and private sectors understand

as a disruptive new money technology.

the potential of this new technology, the

as

exchange

renegade

meltdowns,

currency

may

responsibilities.

Government

may

Bitcoin is more than just a new way to

better prepared they will be to mitigate its

make purchases. It is a protocol for

challenges and realize the benefits of

exchanging value over the Internet without

Bitcoin

an intermediary. Much has been written

currencies.

about the payment applications of Bitcoin,

and

other

similar

virtual

This report explains the technology

including remittances, micropayments, and

underlying

donations. However, Bitcoin could soon

currencies, identifies new applications, and

disrupt

other

intermediaries,

systems
including

that

Bitcoin

and

other

virtual

rely

on

explores the impact of potential future

transfer

of

scenarios. If Bitcoins short history is an

and

indicator, the future of this technology will

property, execution of contracts,

identity management.

be an exciting ride.

As the Bitcoin ecosystem evolves and use

cases emerge, the public and private sectors

BITCOIN OVERVIEW

ITCOIN is best thought of as a

what took it so long.

natural next step in the evolution of

Bitcoin is one of the first currencies

money. Throughout history, many

born on the Internet to be used in the real

items have been used as a store of value

economy. It can be used to make purchases

and medium of exchange, such as cowrie

of goods like smartphones, hotel stays,

shells, clay tablets, coins, and now paper

pizza, and coffee. Other virtual currencies

money. Starting in the 18th century, nation-

have since been created from the same

states increasingly used precious metals

open source code as

such as gold and silver to back their paper

Bitcoin, including Litecoin and Dogecoin,

money, creating a monetary system called

the virtual currency based on the Doge

the gold standard. The gold standard

meme.1 More are popping up every day.

required governments to hold enough pre-

Some of these currencies aim to improve

cious metal reserves to support their

upon Bitcoin's technical or operational

currency. As the global economy became

difficulties, such as transaction speed and

more complex in the second half of the

security. However, Bitcoin so far has

20th century, most nations eventually

sustained its first-mover advantage. It is the

moved away from the gold standard,

most popular and has the highest value in

creating fiat currencies built on laws and

circulation. As of June 4, 2014, there are

trust in government.

12.85 million bitcoins in circulation with a

As our understanding of money as a

store of value, medium of exchange, and
unit of account has matured, so have the

total market capitalization of $8.3 billion. 2

HOW DOES BITCOIN WORK?

Bitcoin is a protocol for exchanging

methods and modes for exchanging it. In

value

this sense, the exchange of money has

intermediary (figure 1). It's based on a

always been a function of the technology

public ledger system, known as the block

available. We moved from precious metal

chain, that uses cryptography to validate

coins to paper money before inventing

transactions. Bitcoin users gain access to

checks, then credit cards. Yet credit cards

their balance through a password known as

weren't created for the Internet era. They've

a private key. Transactions are validated by

simply been adapted to meet the needs of

a network of users called miners, who

consumers operating in a networked and

donate their computer power in exchange

digital

consumer-

for the chance to gain additional bitcoins.

accessible Internet now 20 years old, the

There is a fixed supply of 21 million

question is not why a currency specifically

bitcoins that will be gradually released

designed for the Internet has emerged, but

over time at a publicly known rate. There

world.

With

the

over

the

Internet

without

an

is no monetary authority that creates

about how much currency to create or

bitcoins. The capped supply of 21 million

attempt to defend it through monetary

is known to all, and the rate of supply

policy actions.3

diminishes over time in a predictable way.

In

order

to

process

bitcoin-

As a store of value, this means that bitcoins

denominated transaction, Bitcoin verifies

are inherently deflationary. It also means

two facts addressed by current payment

that there is no government or central

systems like PayPal or

entity to make discretionary decisions

Bitcoin

Figure 1. How Bitcoin works

Bob owes Alice money for lunch, so he

To pay her, he

picks up his smartphoneand opens his

needs two

Bitcoin smartphone app.

pieces of
information:
his private key
and her public key.

Bob gets Alice's

The app alerts

public key by

Bitcoin "miners"

scanning a QRcode

around the

from her phone, or

world of the

by having her email

impending

him the payment

transaction.

address, a string of
seemingly random
numbers and letters.*

The miners

Miners race to bundle data from the

verify that Bob

pending transaction with other unrecorded

has enough

transactions,

bitcoins to

transactions recorded in the public ledger,

make the

as well as a random number known as a

payment.

nonce.

plus

the

last

block

The hashed block

Then the miner applies a mathematical

must have a certain,

function known as a hash, which produces a

but arbitrary, number

unique

of zeroes at the

cryptographic "fingerprint" that makes

beginning. It's

transactions verifiable.

unpredictable which
will produce a hash

with the correct number of zeroes, so

the miner has to
keep trying different
nonces to find the
right value.

of

When a miner finds a hash with the correct

The algorithm

number of zeroes, the

rewards the

discovery is announced to the rest of the

winning miner with

network. Other miners communicate their

25 bitcoins, and

acceptance when they turn their attention

the hashed block is

to

published in the

finding the next block, with the newly

public ledger.

made
block as a component.

Within 10 minutes of Bob initiating

The parties receive

the transaction, he and Alice each receive

the first

several more confirmations as the block

that recorded their transaction is

confirmation that the bitcoin was

embedded into subsequent blocks.

signed over to her.

* Anyone who has a public key can send Source:

American

Banker,

money to a Bitcoin address, but only a http://cdn.americanbanker.com/media/ui/howsignature generated by the private key can bit-works-big.jpg.
release money from it.

Graphic: Deloitte University Press | DUPress.com

Visa. The first is that when user A transfers

Exchanges provide access to the Bitcoin

a bitcoin to user B, user A has a bitcoin to

protocol

spend

curren

(that

is,

prevention

of

counterfeiting). The second is that when

user A transfers a bitcoin to user B, user A

by

Payment processers support merchants

in

another user, user C, simultaneously (that

accepting

is, prevention of double spending).

services.

companies

is

consumers

and

traditional

cies for bitcoins and vice versa.

is not trying to transfer the same bitcoin to

As Bitcoin matures, an ecosystem of

exchanging

bitcoins

Financial

emerging

to

support

support

retailers

in

storing,

Bitcoin

for

service
through

goods
providers

insurance

exchanging, and accepting bitcoins for

Bitcoin-

goods and services:

inspired financial instruments.

Banks and wallets store bitcoins for

users either online or on storage devices
not connected to the Internet, known as
"cold storage."

and

or

What are the qualities of Bitcoin as a

technology system?
Bitcoin

has

three

qualities

that

differentiate it from other currencies and

payment systems.

Fact. Fiction. Future.

computing

power

to

validate

Miners are individuals that provide

transactions

by

the computing power for Bitcoin's

cryptographic problem, called a hash

validation process in exchange for the

function. By using their computing

opportunity to gain new bitcoins.

power for this work, miners are

Together, miners make up Bitcoin's

rewarded with bitcoins. This is how

distributed network. Miners use their

new bitcoins enter the money supply.

solving

Because the money supply is capped

designed to perform highly specialized

and the rate of supply diminishes over

computations to mine bitcoins. In the

time, the difficulty of creating a block

early days of Bitcoin, miners were

increases and the actual amount

mainly

rewarded for each new block created

computers to solve relatively simple

decreases.

cryptographic problems. Now, miners

Mining has been the subject of

are raising investor dollars to construct

significant media coverage, as an arms

server farms optimized for bitcoin

race has grown around hardware

mining.

First, Bitcoin is peer to peer,

it.

hobbyists

using

personal

transferring value directly over the

Third, Bitcoin is self-propelling. Bitcoin

Internet through a decentralized

uses its own product, bitcoins, to reward or

network without an intermediary.

"pay" miners who are providing the

Current payment systems, like

computing power that serves as the engine

credit cards and PayPal, require an

of the transaction verification system. As a

intermediary

validate

result, the system does not require the

transactions; Bitcoin does not. As a

same type of overhead that traditional

result, Bitcoin has been referred to

payment systems might require. In this

as "Internet cash," as it can be

sense, Bitcoin functions because of those

exchanged from person to person

participating in the system.

to

much like paper currency today.

These three aspects are part of what

Second, Bitcoin is open, yet securely

drives Bitcoins success, enabling a nearly

authenticated. Traditional payment systems

frictionless

rely

However, these same factors have also

on

the

privacy

of

transaction

information to maintain security. For

example, the compromise of a credit card
transaction can result in the release of
valuable information that can be used to
conduct future transactions. In comparison,
Bitcoin relies on cryptography. As every
transaction is validated with cryptography
by the network of miners, Bitcoin functions because of its openness, not despite

global

created challenges.

payment

system.

Bitcoin caveats: Speculation, regulation, and

whatever

global

regulatory

environment

around Bitcoin remains uncertain. Any

In order to achieve wider adoption as a

currency,

The

address

rumors of a policy change can significantly

volatility,

affect Bitcoin prices, reducing its stability

regulatory uncertainty, exchange security,

as a currency. At the same time, businesses

ease of use, and transaction volume.

are unwilling to engage in the Bitcoin

significant

Bitcoin

Bitcoin

needs

questions

to

news of new government scrutiny or

around

driven

economy, while governments treat it as a

reducing

fringe movement that is the purview of

Bitcoins utility as a medium of exchange.

black-market operators and drug dealers,

People maybe reluctant to use Bitcoin to

such as Silk Road. As governments begin

make large future commitments of value, or

to issue consistent guidance on Bitcoin,

even buy a cup of coffee, when the price

businesses may become more willing to

can change by 30 percent overnight. Unless

accept it as a form of payment.

significant

speculators
price

have

volatility,

Bitcoins volatility settles, it will be used

Security problems, punctuated by highly

less as a currency and more as a vehicle for

publicized

speculation and "get rich quick" schemes,

prevent

exchange

meltdowns,

may

much like a penny stock.

Bitcoin

mainstream usage of bitcoins as a currency.

built on unstable platforms with little

Many exchanges that have suffered

security, due to their having been created

including Mt. Gox, which experienced the

when bitcoin trading was small and

most notorious exchange collapsewere

nascent. Mt. Gox was like a bank storing

One of the first major

online retailers to accept
bitcoins, Overstock.
com, made more than
$124,000 in bitcoin sales
on January 10, 2014, its
first day of accepting
the currency

valuables in the lobby entrance. To mature,

Visa cards and over 2 million ATMs.5 It can

exchange security needs to be as strong as

do this because it charges fees for the

at traditional banks.

resources required to operate its servers. In

The requirements

order to support mainstream transaction

necessary to safely

volumes, the Bitcoin system for validating

store bitcoins have

transactions will likely have to change how

created ease-of-use

it uses electricity, bandwidth, and data

problems.

storage.

Though

digital wallets have

Despite these obstacles, mainstream mer-

worked

solve

chants are beginning to explore Bitcoin.

these

One of the first major online retailers to

best

accept bit-coins, Overstock, com, made

practices for storing

more than $124,000 in bitcoin sales on

bitcoins

include

January 10,2014, its first day of accepting

locking flash drives

the currency. By March 2014, Overstock,

in a bank vault.

com had topped $1 million in bitcoin

Really? Mainstream

purchases. The company has revised its

consumers are

bitcoin revenue projection for 2014 from

unlikely to use Bitcoin until wallet services

an initial $3-5 million to $20 million.6

develop more user-friendly and secure

According

storage techniques.

popularity and its low fee structure drove

some

to
of

problems,

Validating

transactions

to

Overstock.com,

Bitcoins

requires

new consumers to its marketplace. More

significant electricity, bandwidth, and data

large-scale merchants and mainstream

storage. The resources required to support

actors in the global economy are following

Bitcoins

of

suit. SecondMarket, an online marketplace

transactions are already being pushed to

for buying and selling illiquid assets such

their limits. Currently, Bitcoin averages

as venture-backed private-company stock,

about 60,000 transactions per day.4 VisaNet,

is opening a Bitcoin trading platform for

the electronic payment processing network

institutional investors.

relatively

small

volume

used by Visa, handles more than 150

million transactions daily from 2.1 billion
Fact. Fiction. Future.

Bitcoin: Beyond money

ITCOIN is more than a new

fee of 9 percent, with some banks charging

currency. Bitcoin and other virtual

an additional fee of up to 5 percent for

currencies are creating a new

turning the remittance into cash. 7

architecture for exchanging information

Bitcoin allows for a direct payment to

over the Internet that is peer to peer, open

anyone, anywhere in the world, at any time

yet secure, and nearly frictionless. Imagine

(figure 2). With Bitcoin, an individual

how other systems that rely on inter-

could transfer value to his or her cousin in

mediaries,

such

transfer,

India without paying a fee to a global

contract

execution,

identity

money transmitter or a bank for the wire

management, could be disrupted by a

transfer. Though most uses of Bitcoin to

similarly open peer-to-peer system.

make payments will rely on third parties,

System of payment

like Coinbase, Bitcoin may allow these

as

property
and

Bitcoin reduces friction in payments.

companies to charge lower fees than they

Currently, when an individual transfers

do today. This could disrupt the global

funds, he or she must work with a third

remittance market, valued at $514 billion in

party. This intermediary, such as a credit

2012, by providing a less expensive method

card or payments company, often exacts

for direct transfers

high fees. For example, for remittances,

providers may be forced to lower fees or be

there is an average

replaced by entrants like BitPesa, a mobile

Figure 2. Payment process: Current versus

payment application for Bitcoin in the

Bitcoin

developing world.

Current

payment

systems

require

globally.8 Current

. but machine-to-machine payment using

third-party intermediaries that often charge

the Bitcoin

high processing fees

protocol could allow for direct payment

between
individuals,

as

well

as

support

micropayments.
GraDhic

ty Press

Deloitte

DUPres

Universi

s.co

Bitcoin
ADDITIONAL
FOR

USE

BITCOIN

IN

CASES

a very small financial transaction

THE

that

PAYMENT SPACE INCLUDE:

Micropayments. A micropayment is
occurs

online.

Practical

systems to allow for the transfer of

Banking services in developing

$1 or less online with a credit card

countries. Developing countries

do

with appropriate mobile phone

facilitate the direct payment to

infrastructure may be able to

musicians for individual songs or

leapfrog the developed world in the

the ability to "tip" individuals on

maturation of mobile finance. As a

Twitter, Reddit, or other social

form of electronic banking, Bitcoin

media platforms. It could also be

could be an avenue for financial

used for newspapers and other

inclusion in emerging markets.

content producers looking for new

not

exist.

Bitcoin

could

revenue models.

In the same way that Bitcoin lowers

lowered to as little as 1 percent. 10 This

transaction costs for remittances, it could

could

ultimately

evolve

into

new

also lower transaction costs for everyday

payment system for credit card companies

purchases of low-margin items. Today, if

and banks.

someone buys a donut with a credit card,

Transfer of property

the merchant pays an interchange fee to the

The Bitcoin protocol could simplify

credit card issuer. This interchange fee is

complex asset transfers, revolutionizing the

usually a small flat amount (10-20 cents)

services that support this industry (figure

plus a percentage of 1-3 percent.9 For a

3). Currently, the transfer of large assets

low-margin good like a donut, a 10- to 20-

requires significant time and resources. For

cent flat fee can approach 100 percent of

example, in order to purchase a car from

the cost of goods. This interchange fee is

an individual seller, one has to engage a

often passed on to the customer. Using

third

Bitcoin, the transaction fee could be

Additionally, one has to use services to

party

to

transfer

the

title.

learn

about

the

car's

accident

and

real-world

assets.

Bitcoin

inspection history. And who doesn't like to

entrepreneurs at companies like Colored

spend a Saturday at the Department of

Coin are already working on ways to use

Motor

small portions of Bitcoin to denote physical

Vehicles

updating

car

registration?

property. A fraction of a Bitcoin would

The block chain, Bitcoin's public

publicly identify who currently owns that

ledger, could change all of this. Bitcoins can

property, and could include a record of

be qualified in such a way that they

both past ownership and other history

represent

about the property. When purchasing a car,

one would be able to verify all accidents
and inspections over the block chain and
transfer the title on site. Similarly, real
estate and financial instrument transactions
could all be executed over Bitcoin or a
similar protocol.

This

could

soon

create

efficiencies and reduce friction by

allowing

individuals

to

directly

transfer property without the use of a

broker, lawyer, or notary to sign off on
the transfer.

Execution of contracts

Bitcoin could similarly be used to

structure contracts, bringing new efficiency

and transparency to the process (figure 4).
Contracts

are

typically

developed

by

lawyers on a case-by-case basis, with

significant time and resources devoted to
negotiation,

development,

and

enforcement. Additionally, markets based

on contracts, including certain financial
derivatives markets, lack transparency,
which complicates regulation.

Traditional

contracts

could

be

replaced by code that self-executes when a

triggering event occurs. In a simple

instrument, like an option, could be

reveal their specific positions. It is

developed and executed over the

possible that new crypto-currencies

block chain. In addition to reducing

will emerge to serve these niche

legal fees, this could bring new

purposes.

transparency to financial markets,

example, a financial

New ventures, like Ethereum, are

as regulators could use the public

creating these capabilities today. Ethereum

ledger to understand the market

is developing a network to serve as both

without forcing individual actors to

the registry and

Figure 3. Individuals transfer property

over the block chain, providing visibility into

property ownership and history

"-^5
IT

"**

Person A

Person B

purchases a car from a dealer. That car

purchases the car from Person A and

is represented in the block chain by a

learns the car

bitcoin, allowing the purchaser to

was in an accident by

view the car's history in the public ledger.

reviewing the car's history

in the block chain.

 Person C

Person D

purchases the car from

purchases the car from

Person B and learns the car

Person C and reviews the

was serviced regularly and

car's history in the block

there was an accident by

chain to learn about the

reviewing the car's history

accident, service history,

in the block chain.

and recent work that was

done on the car to pass

an emissions test.

Graphic: Deloitte University Press | Bitcoin-based contracts could enhance

DUPress.com

transparency

anonymity of the individuals directly

Figure 4. Using the block chain,

while

maintaining

the

involved

010101011001101

010101011001101

010101101010110

An option contract between parties is

written as code into the block chain. The

individuals involved are anonymous, but
the contract is in the public ledger.

010101101010110

A triggering event like an expiration

date and strike price is hit and the contract

executes itself according to the coded terms.

Regulators can use the block chain to

while maintaining the privacy of

understand the activity in the market

individual actors' positions.

University Press

Deloitte

| DUPress.com

Bitcoin

the location of citizens abroad through

Figure 5. Regulators can be sure of

cryptographically

secure

identity

management on the block chain

01

@M i

Graphic:

Deloitte

01

University Press

01

DUPress.com

chain

escrow to execute the conditions of

movement across borders (figure 5). When

a contract automatically through

a person travels through a checkpoint at a

rules that can be checked by others.

border crossing, instead of showing and

Identity management

scanning a paper passport, he or she could

Bitcoins cryptography and block

present his or her Bitcoin key. A network

could

management.

also

transform

Much

of

identity
identity

management, including passports, still

operates on a paper-based system. These
documents are frequently forged and
stolen. Interpol's database currently lists 39
million stolen travel documents. But what
if there was a way to create a unique,
verifiable key that was impossible to forge?

A cryptographic network similar to

but separate from Bitcoin could be used to

verify individuals' identities and monitor

privately maintained by

the government, a contractor, or

management are only a few examples of

other entity could verify the key

how a peer-to-peer, open, and frictionless

and register the entry into the

system could change business in the future.

ledger. This

system,

based

on

In order to achieve this wider adoption,

cryptography

instead

of

paper

Bitcoin will need to address significant

documents, would simultaneously

questions around trust, ease of use, and

increase mobility and security. If

operability. To date, the Bitcoin community

Bitcoin can be used for travel

has shown remarkable adaptability and it

documents, it could also be used for

is already working to mitigate these

other forms of identity management

problems. In the next decade, we can

like social security numbers, tax

expect significant innovation around the

identification numbers, or even

Bitcoin network. Though much of that will

drivers licenses.

revolve around payments, particularly early

Property, contracts, and identity

on, the evolution of Bitcoin could take

several diverging paths.

10

Fact. Fiction. Future.

Future of Bitcoin

will

Krugman, who in 1998 predicted that the

influence

Bitcoins

Internets impact on the economy would

evolution,

including

be no greater than the fax machines, were

regulation, technological innovation, and

dead wrong, though for understandable

economic conditions. Predicting the future

reasons.11 Timelines for the adoption and

of Bitcoin today resembles what it must

extension of new technologies are inher-

have been like to try to comprehend the

ently unpredictable, primarily because

significance of the Internet in the 1990s.

their ultimate impact will be a result of

Some experts, such as Ray Kurzweil in his

how humans interact with them.

ANY

factors

book The Age of Intelligent Machines, first

Bitcoins

future

can

best

be

published in the late 1980s, got it

understood by considering four scenarios

spectacularly right. But others, like Paul

that

represent

range

of

possible

outcomes.

penny stocks instead of a payment

"Life on the fringe"

system. In short, the focus on bitcoins

"Investors flee Bitcoin as another

obstacles as a currency prevent the benefits

exchange collapse sends bitcoin prices

of the technology from being fully realized.

plummeting"

How you can tell if this scenario is

happening:

Bitcoin, the currency, never solves

its trust and security problems, reinforcing

Another exchange meltdown, security

price volatility and skepticism. It remains

breach, or operational failure occurs

and

Volatility continues to be 10 to 15 times

speculation. As a result, companies in the

higher than traditional assets such as

Bitcoin ecosystem are unable to enter into

gold12

an

arena

mainstream

for

illegal

commerce.

activity

Exchange

Bitcoin suffers a flash crash

collapses and sales of illicit goods and

Why

this

services continue to occur. The majority of

happen:

scenario

might

not

bitcoins are held by speculators, crowding

The Bitcoin community solves the trust

out users who want to use the protocol to

and security problems related to bitcoin

make legitimate purchases. Bitcoin and its

as currency

imitators resemble

Bitcoin as technology overwhelms the

reservations about bitcoin as currency
by
creating new offerings and markets

What government's role could be:

Issue guidance and regulations on Bitcoin

as a currency and as a technology,
signaling
that both aspects can be taken seriously
Focus on enforcement for illicit activity,
like
money laundering
Create safeguards to protect mainstream
consumers from being victimized by
Bitcoin wallet and exchange scams

"CorporateCoin"

protocol

"Payment card companies compete to

offer

low-fee

Bitcoin-based

payment

source technology

options"

Payment and technology companies

What government's role could be:

Enable companies to use Bitcoin as a

incorporate the Bitcoin protocol into their

pay

payment systems. These companies build

ment mechanism through tax and

proprietary

financial

payment

platforms

using

cryptography for security and the block

chain for transaction validation. Bitcoin

crimes enforcement guidance

Encourage payment companies to use

moves to the back office and becomes

the

invisible to the consumer in the same way

Bitcoin

that different Internet protocols are invis-

solutions

ible to most web users. As a result,

for underbanked populations

payments

occur

across

the

Bitcoin

protocol, but consumers are not required

to hold bitcoins. This drives down fees for
payment cards and eliminates exchange
risk. In short, the Bitcoin protocol grows
as a money technology, is adopted by
mainstream institutions, and begins to
serve as the backbone of many Internet
transactions.

How you can tell if this scenario is

happening:

Services offered by traditional payment

solutions,

like

credit

and

fraud

protection,
are provided around Bitcoin

A new wallet technology is introduced

in
the form of a Bitcoin payment card

Corporations continue to distrust open-

Why this scenario might not happen:

Large payment companies lower fees to
match Bitcoin without adopting its

protocol

to

offer

low-fee

"Satoshi for all"

of value are executed in a peer-to-peer and

"Regulators rescue Wall Street after

open, yet secure way, reducing fees and

block chain exposes new market risk"

increasing transparency.

Bitcoin becomes the protocol for all

transfers of value, creating new visibility

happening:

into financial markets and transforming

the

services

around

these

functions.

management,

are

all

Professionals

like

Bitcoin-based

central

clearinghouse
is launched

and maintaining the block chain. The

process of regulation is changed as well.

Why this scenario might not happen:

Economic path dependence on current

Regulators download the ledger for a

sys

market, such as commodities, every day.

tems

Bitcoins pseudonymity allows regulators

disruption

to understand the risk of entire markets,

prevents

such

significant

Stakeholder interests challenge adoption

while still maintaining the privacy of

A Bitcoin programming skills gap

individual actors. The government creates

expands

the Block Chain Administration to oversee

as

cryptographic

increases

and

is

created and traded over the block chain

traders and lawyers focus on writing code

exchanges

property

are

the services that support these functions

revolutionized.

physical

Financial instruments, such as options,

performed on the block chain. As a result,

are

of

over the block chain

as property transfer, contract execution,

identity

piece

exchanged

Exchanges of value and information, such

and

How you can tell if this scenario is

provide

the

demand

for

programmers

consumer protection. In short, all transfers

12

What government's role could be:

Provide

consumer

protection

education

Regulate

and enforcement
and

block

chain-based

transfers,
providing standardization, security,

"New networks"
"Number of individuals working 15

or more jobs reaches 10 percent of US

population"

Two key attributes of Bitcoin enable

a transition to a new model of work and

reward

employment. First, Bitcoin's utility in

menters for input

facilitating micropayments allows people

to more easily receive compensation for
the many tasks they perform as part of a
digital network. Second, and perhaps even
more important, is that Bitcoin is a selfpropelling,

decentralized,

peer-to-peer

network that allows its members to derive

both

income

and

utility from their

participation. Todays technology services,

like email and social media networks,
provide utility to users free of charge and
generate income for owners. But as the
saying goes, if you're getting something
for free, you aren't the customer, you're the
product. In a Bitcoin world, users are both
the customer and the product, because
individuals participate in the Bitcoin
network by both exchanging the currency
and validating the transactions. Currently,
at the average day job, a person may spend
eight hours at her desk and be paid an
income for that one role. In addition, he or
she is tweeting, reading news articles, and
checking out blogs, generating valuable
data throughout the entire day. In the
future, we could engage in these same
activities and get paid for all of them as
Bitcoin enables payment for the myriad
activities individuals perform as part of a
networked economy.

How you can tell if this scenario is

happening:

Mainstream

online

media

sites

com-

public

technology

company

possible in the near term, which may lay

for

the groundwork for the seemingly more

accounts
user income on its 10-K

Why this scenario might not happen:

argue that Bitcoin will be the Esperanto of

This is a major departure from our

finance.13 But, others are intrigued by

current

Bitcoins potentially more revolutionary

employment model

impact. As Kevin Kelly, co-founder of

Achieving

this

scenario

requires

for the New Economy, "The great benefits

ical savvy on a larger scale than exists

reaped by the new economy in the coming

today

decades will be due in large part to

What government's role could be:

exploring and exploiting the power of

Adjust definition of employment to

decentralized and autonomous networks."14

include

Bitcoin is an early example of this future.

this new type of work

Wired, writes in his latest book New Rules

technolog

distant scenarios. Certainly, some skeptics

Given the spectrum of possible

Refocus taxation and other policies

scenarios, the range of actions available to

to

governments and businesses is broad.

stimulate this new type of work

Some foreign governments have tried to

Tap into the new labor pool created by

ban Bitcoin by making the exchange of

this

cash for bitcoins illegal. Others have taken

employment model

a "wait and see" approach, allowing the

These scenarios lie within the realm

ecosystem around Bitcoin to develop while

of the possible. Though the first scenario is

closely monitoring it. In the United States,

closest to the status quo, current trends

government agencies have begun to

may indicate that the second scenario is

Bitcoin

issue taxation and other guidance,

how new technologies and trends can pop

paving the way for entrepreneurs to create

up seemingly out of nowhere, creating

a new wave of Bitcoin-related companies

problems and opportunities for government

and large corporations to engage in the

as it sorts out how to respond. Most

Bitcoin economy.

governments chose a hands-off approach

Bitcoin is yet another example of

to the Internet when it emerged in the

1980s. But the lessons of the Internet

everything.

Bitcoins

direct

should be fair warning that these new tech-

relevance to traditional government

nologies can come out of nowhere and

domains, such as currency and

change

taxes, merits specific consideration.

Given its broad potential impact on
activities from contracts to identity
management, agencies tasked with
diverse operations, from financial
markets oversight to border patrol,
need to monitor Bitcoins evolution.
Governments need to understand
how Bitcoin will evolve in the short
term. But even more importantly,
they need to explore how the
concepts

underlying

this

new

technology could intersect with

their mission in the future.15

14
Fact. Fiction. Future.

1. Doge is a slang term for "dog" that is

primar

with interior monologues in Comic Sans

font.

ily associated with pictures of Shiba

Inus
(nicknamed

Endnotes

2. Blockchain,

"Bitcoin

charts,"

https://block"Shibe")

and

internal

monologue
captions on Tumblr. These photos

chain.info/charts, accessed June 4,

2014.
3. Staci Warden, "Bitcoins: Currency of

maybe

the

altered to change the dog's face or

future?" presented at The Impact Lab,

captioned

George

town University Beeck Center, April 10,

World Bank," Gulfnews.com, April

2014.

20,

4. Blockchain,

"Number

of

2013, http://gulfnews.com/business/

transactions,"
http://blockchain.info/charts/ntransactions. accessed June 4, 2014.
5. Visa, Inc., VisaNet: The technology
behind

Visa,

2013,

pp.

2-5,

http://usa.visa.com/download/
corporate/

media/visanet-technology/

visa-net-booklet.pdf , accessed June 4,

2014.
6. John Southurst, "Overstock CEO Patrick
Byrne
to keynote Bitcoin 2014 conference,"
CoinDesk,
March

25,

2014,

http://www.coindesk.com/
overstock-ceo-patrick-byrne-keynotebitcoin2014-conference/.

accessed

June

4,

2014.
7. Joshua Brustein, "Will migrant workers
drive

Bitcoin's

mundane

future?"

Bloomberg
BusinessWeek,

October

8,

2013,

http://www.
businessweek.com/articles/2013-10-08/
will-migrant-workers-drive-bitcoinsmundane-future, accessed June 4, 2014.
8. Saifur Rahman, "Global remittance
flow
grows 10.77% to $514 billion in
2012:

economy/global-remittance-flo

12. Eli Dourado, "The Bitcoin volatility

w-grows-10-77-to-514-billion-in-

index,"

2012-world-bank-1.1172693,

http://btcvol.info/, last modified May

accessed June 4, 2014.

31, 2014.

9. Visa, Inc., "Visa U.S.A. interchange

13. Stephanie Baker, "Bitcoin bets feed

reimburse

Twitter

ment

fee,"

dreams

as

regulators

circle,"

http://usa.visa.com/download/mer

Bloomberg,

chants/visa-usa-interchange-

October

reimbursement-

http://www.bloomberg.

fees-april2013.pdf. last modified April

com/news/2013-10-02/bitcoin-bets-

20, 2013.

feed-twitter-dreams-as-regulators-

10. Jason Del Rey, "Stripe merchants will

2,

2013,

circle.

soon

html, accessed June 4, 2014.

be able to accept Bitcoin payments,"

14. Kevin Kelly, "Maxims

Re/Code,

for the

network

March

27,

2014,

economy,"

http://recode.net/2014/03/27/

http://kk.org/newrules/se-

stripe-merchants-will-soon-be-able-to-

lected maxims.php, accessed June 4,

accept-

2014.

bitcoin-payments/, accessed June 4,

15. Selections of this paper previously

2014.
11. Paul

appeared
Krugman,

"Why

most

in a Harvard Business Review blog

economists'
predictions

authored
are

wrong,"

Red

by Tiffany Wan and Max Hoblitzell,

Herring,
June

published
10,1998,

on April 24, 2014. The blog post can be

http://web.archive.org/

accessed

web/19980610100009/www.redherri

http://blogs.hbr.org/2014/04/

ng.

bitcoins-promise-goes-far-bevond-

com/mag/issue55/economics.html .

pavments/ .

here:

Bitcoin

16

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