LET ME START by explaining centralised versus decentralised currencies because that is one of the fundamental differences between this currency system and others that have come before it.
The Central Bank of Barbados and all central banks are by definition central, they issue currency which is backed and we have seen throughout the various countries in the world when there is irresponsible fiscal policy you have out of control inflation rates.
That’s also been reflected in the online attempted issuers of digital currencies – Perfect Money was one, Liberty Reserve is another. The fundamental problem that you have when you have a central authority is you have a central point of failure. You have to put your trust in the issuer, you have to rely upon their integrity, you have to rely upon the cybersecurity of their databases and oftentimes this is too much of a burden for people to put their faith in the abstract concept of money.
Where decentralised currencies – and bitcoin is the first of these – have changed the paradigm entirely, is that instead of now relying on one central party you have a network of computers around the planet communicating and maintaining what they call a blockchain, which is essentially an accounting ledger or database. And over time these nodes in this network communicate and maintain consensus, it becomes very difficult to subvert and cheat a publicly available, transparent, open source, low cost, database. And so when you start to look at the applications of this technology it is as profound as the Internet has been and will continue to be in our lives.
So let’s start with bitcoin and how it works. There are only going to be 21 million bitcoin that ever exist, however, each bitcoin is broken into 100 million units, so there actually will be 21 quadrillion units of account, which are all unique in nature, which is a characteristic of digital goods which has never existed before because when you have something represented in ones and zeros you can copy it and you can paste it. When you put it on a blockchain ledger which traces the origin and every transaction point of this unique bit of data, you have a new tool in the online world, which is unique digital assets.
So bitcoins are created by miners, miners secure the networks, they process the fees. Visa is the processor of the Visa network, MasterCard is the processor of the MasterCard network, every single bitcoin miner is competing with every other bitcoin miner to process your transactions, which is why we can send US$45 million for three cents US.
This is a competitive environment and what that means for the financial institutions, unfortunately, if you are not innovating it means you are going to be disrupted, you will have to consolidate as has been the case with digital film and Kodak, as has been the case with digital music and the record labels and many other examples. You either respond to disruption and innovation or you are disrupted upon.
So you mine your bitcoin, bitcoin are sent to a public address, that’s the equivalent of your bank account number and they are controlled by a private key, which is the equivalent of your password. You lose your password, you lose your bitcoin, you give people your public address anyone in the world can send you bitcoin. This means that we can send payments across the planet near instantaneously, we can send payments to one another peer to peer.
In the context of e-commerce in Barbados and the region, you can make payments to businesses for goods and services. How do you get bitcoin if you are not a miner? It is a very expensive hardware intensive process to mine bitcoin, it’s only done by specialists in this decentralised network.
So to get bitcoin or digital currencies or digital blockchain assets you need to go through the gateways. Bitt is one such gateway, we are the only gateway in the Caribbean, we are an exchange, which means that somebody comes with their fiat currency and they want to buy bitcoin or a digital asset they have to go through our process, and we self-regulate and work closely with the regulators to maintain anti-money laundering and the same compliance standards that you would be very familiar with today.
So the truth is you can get bitcoin if you mine them, if you build a data centre as it stands today, otherwise you have to go through the gatekeepers and then once you are in this network you have a profound set of tools.
So how do you use bitcoin? It’s very simple, if you have WhatsApp you are half-way there already, you download a mobile wallet or you sign up to a web service, you go through a compliance process, you get your bitcoin wallet and you can display that as a QR code, which you should be familiar with, it’s like a barcode, and people can send bitcoin to that address.
However, the applications of this technology and the blockchain are more far-reaching than just bitcoin.
Oliver Gale is co-founder and chief financial officer of Bitt, a Barbados-based digital asset exchange, remittance channel and merchant processing gateway. He made these comments during a presentation at the recent Domestic Financial Institutions Conference. Part 2 will be published next week.