Bitcoin, the first decentralized digital currency, has had a difficult time getting traditional financial companies to accept it. But recently, the tides are turning as businesses start looking toward the technology as a model for innovation.
Even though Bitcoin still has a number of problems with scaling and market penetration, the technology behind it shows potential for massively improving the way our financial system functions.
The current financial system can easily run into trouble on a variety of different fronts. Every year, major companies lose millions of customers’ sensitive data to massive computer hacks. Or evidenced by the situation in Greece, sometimes banks fail and customers are prohibited from retrieving their own money. Bitcoin’s main appeal is that it is a decentralized currency, without a central organization vulnerable to cyberattacks, political instability, or bankruptcy.
There is no Bitcoin company that verifies the authenticity of each transaction when someone pays for an item with Bitcoin. Rather, each Bitcoin transaction is verified by a collection of computers working to build the “blockchain,” a digital public record of all Bitcoin transactions (though users’ identities are anonymous). The computers that work to verify transactions and update the blockchain are said to be “mining” Bitcoins. While the computers race to solve a complex mathematical problem and verify transactions, the computer that solves the problem first is awarded a set number of Bitcoins – creating a financial incentive for users to devote their own computing power to processing others’ transactions correctly.
The result is that most merchants can accept Bitcoin for payment and save money on processing fees. Whereas credit card companies typically charge around 3 percent, companies that help merchants connect their retail systems to the Bitcoin network typically charge closer to 1 percent.
Though Bitcoin itself has been plagued by legal trouble and failed to grow as quickly as expected, the underlying blockchain technology has started to interest large financial institutions. Because the blockchain is public, transparent, and simultaneously maintained by computers around the world, it’s extremely resistant to attack.
“With tens of thousands of individuals verifying every transaction, colluding to subvert things becomes so expensive and difficult that there’s simply no point in trying,” wrote Dan Wellers of SAP, a computer software company, in Forbes. “Thus, rewards for honest behavior are built into the system, while dishonest behavior isn’t rewarded.”
According to CNBC, many major companies have already begun researching how to leverage the blockchain technology, including Barclays, IBM, Samsung, Intel, and the Nasdaq stock exchange. Nasdaq announced a major partnership with Chain, a company that aims to provide financial institutions with access to the blockchain technology. “As blockchain technology continues to redefine not only how the exchange sector operates, but the global financial economy as a whole, Nasdaq aims to be at the center of this watershed development,” said Nasdaq CEO Bob Greifeld.
Already, several startups are working to use the public ledger aspect of the blockchain to reinvent how contracts, business agreements, and other important documents are stored and verified.
The Economist reports on many of these transformative efforts. “Bitcoin, the currency, is a risky investment. But the potential of technologies that underpin it to disrupt the finance sector is looking like a safe bet.”