On Bitcoin and beyond

BitDepth#942 for June 24

Shiva Bissessar explains cryptocurrencies at a recent TTCS tech meeting at Open Campus.  Photograph by Mark Lyndersay.
Shiva Bissessar explains cryptocurrencies at a recent TTCS tech meeting at Open Campus.
Photograph by Mark Lyndersay.

It started as a discussion in two parts about Bitcoin and other cryptocurrencies, but it soon became a micro-referendum on the basic differences between digital currencies and traditional financial systems.

The talk featured Richard Jobity, an economist and business analyst who worked for a decade at the Central Bank and Shiva Bissessar, a young technologist, currently Managing and Technical Director of Pinaka Technology Solutions who also wrote is MSc thesis on cryptocurrencies.

The two men presented to a small group gathered by the Trinidad and Tobago Computer Society (TTCS) at UWI’s Open Campus two weeks ago.

At the centre of their differing perspectives that evening is the central issue that’s emerging out of this emergent virtual system for assigning value and trading it digitally.

Bitcoin at its simplest is digital cash, electronically created and stored and accepted by members of its virtual community as a medium of conveying value.

Introduced as open-source software in 2009 by the pseudonymous developer Satoshi Nakamoto, it is the best known of a new generation of cryptocurrencies; technologies powered by the enormous complexity of cryptography algorithms.

Indeed, working on the complex mathematical calculations that underpin Bitcoin’s technology is how one earns its units of value, known as bitcoins.

Participants hoping to earn bitcoins volunteer their computer’s processing power to verify and record payments into the block chain, a public ledger that acts as both a repository for bitcoin holdings and a protected accounting of all transactions made with the currency.

That process, called mining, takes time and significant computing power and anyone trying to mine bitcoins today will take significantly longer than users who began working with the system years ago.

It’s becoming common to organize mining pools to bring enough computing power to adding a block, which currently earns 24 bitcoins, but that’s paid to a single bitcoin address, the unique identifier that allows access to a user’s account.

Bitcoin miners earn these units of value along with transaction fees, but that value will drop by half every four years until a total of 21 million bitcoins (expected in 2140) have been mined and then only transaction fees will be paid for processing.

And it’s already very difficult to become a profitable miner. Bitcoin specific systems are being developed that far exceed the computing power of the average consumer computer.

It’s now more common for bitcoins to be used as an intermediary value for commercial transactions, with users buying bitcoins at an ATM created for such transactions or in online bids.

In 2013, several major online resellers began accepting bitcoins as payment for goods, including Overstock.com, Tiger Direct and Expedia.

Some folks have used bitcoins to buy Caribbean citizenship.

But don’t mistake digital controls for financial oversight. Bitcoins are traded like cash, not monitored currency transaction instruments like bank transfers or credit cards.

The Silk Road project, created as an anonymous digital trading website by Ross William Ulbricht, was shut down by the FBI in October 2013 after it was discovered that it was being used as a hub for payments for a range of illegal activities.

More than 170,000 bitcoins were siezed as part of that shutdown, worth over US$30 million in the digital marketplace.

The unmonitored currency, which depends on digital self-correction for controls, has been plagued by sudden drops in value, collapses of major exchanges, most notably the Mt Gox failure, and very suspect transactions facilitated by its freely tradeable nature.

As Richard Jobity noted during his talk, to qualify as money, a medium of exchange “must be reliably saved, stored and retrievable and it must be usable when it is retrieved.”

Under the Financial Act of 2008 in T&T, the Central Bank regulates all electronic currency, including international money transfers, but it’s not clear that bitcoins are money.

The value of a single bitcoin started at US$13, soared to US$1,000 and currently hovers around US$600.

From Jobity’s perspective, bitcoins are a regulatory nightmare, disruptive for financial systems and will demand significant manpower to monitor.

Shiva Bissessar was more bullish on the potential for bitcoins as a lubricant for the economy, pointing to its potential for cash remittances.

In T&T and Latin America, the transfer fee for remittances is 6.21 per cent and in Africa, it soars to an average of 12 per cent, rising as high as 19 per cent.

Bissessar pointed to the example of Kenya’s BitPesa (https://www.bitpesa.co/) which charges a flat three per cent for money transfers.

Such systems leverage bitcoins as a medium to transfer value, moving money from one fiat currency to another with few impediments.

Bissessar would like to see T&T become a centre for large scale bitcoin mining, taking advantage of our relatively low electricity costs.

Gabriel Abed, co-founder of the Koblitz Group (http://koblitzgroup.com/), has been travelling throughout the Caribbean seeking audiences with finance ministers to discuss the potential for instituting a cryptocurrency regime throughout the Caricom region.

Bissessar’s efforts at getting the attention of government finance officials and the Central Bank have not been met with enthusiasm, but he remains confident that the advantages of participating in the growth of cryptocurrencies and taking a leading role in introducing them will be an important asset for the local economy.


Shiva Bissessar’s slide deck on digital currencies

A recorded Skype interview by Bissessar with Gabriel Abed

Is Bitcoin legal?

The legal landscape for Bitcoin (interactive graphic)