Bitcoin accessories pictured at the Plug and Play Tech Center in Sunnyvale, California, in October (Image: Stephen Lam/Reuters)

Editorial: “Cleaned-up Bitcoins could change commerce forever“

Bitcoin is money – people can use it to buy anything from pizza to plastic surgery. The meteoric rise of the online currency has caused everyone from financial regulators to law enforcement to the US Senate to stand up and take notice. But a growing group of computer scientists think this is just the beginning. They are convinced that Bitcoin’s real value is not in providing the world with a currency free from government intervention, but in the technology which underpins it, a secure system of verifying transactions that they believe has the potential to vastly disrupt the way we exchange goods and services around the world.

The secret to Bitcoin’s rampant success is the “block chain” – a secure digital ledger that tracks coins across the internet. It records every single transaction of the currency, and those transactions are then mathematically verified by the computers of Bitcoin users around the world. Anyone who holds bitcoins also has an exact copy of the block chain, making it virtually impossible to create a forgery. This eliminates the need for trusted third parties, like PayPal and Visa, to take part in financial transactions.


Now the block chain is being applied beyond the movement of money using a technique called “colouring” bitcoins. It has the potential to transform commerce. Take the buying and selling of real estate, for example. In a statement before the US Senate Committee on Banking, Housing and Urban Affairs on 19 November, Anthony Gallippi, CEO of Bitcoin payment firm BitPay, described how co-opting the block chain could do away with the gaggle of fees and legal manoeuvrings that usually accompany home sales.

“The biggest up­front costs for consumers trying to buy a home are the closing costs, which include fees for deeds, titles, stamps, title insurance, and other redundant tasks to record the sale in different record books,” Gallippi said. “Bitcoin can replace thousands of dollars in closing costs with a single transaction that costs 5 cents. By reporting deeds and titles on the block chain, the information would be public record forever, for pennies, and eliminate the need for title insurance.”

Indelible record

Colouring bitcoins is a way of digitally labelling a bitcoin or a fraction of one with information about a transaction. When the labelled coin changes hands, it gets indelibly recorded in the block chain. It’s the equivalent of recording the sale of a flock of sheep by writing a message to that effect on a $1 bill, and giving that to the buyer – only with Bitcoin, that record is mathematically confirmed nearly instantly by computers all over the world.

A few researchers have already done this. Amos Meiri, a computer scientist with the social stock-trading firm eToro, based in Cyprus, says he ran a proof of concept last year. He transferred a Bitcoin, coloured to represent a sum of gold, through the block chain. Through an organisation called Colored Coins, Meiri and others plan to launch a beta version of software that executes this process in the next few weeks.

“I’m able to issue one coloured coin which resembles 1000 shares of stock, and sell it to you,” Meiri, says. “When I sell it to you I give you all the rights for voting and dividends without paying a commission to stock markets or brokers. We basically put another layer above Bitcoin. Instead of holding the currency, you’ll be able to hold and trade gold, Apple stock, your own car.”

Others are building similar services. Mike Hearn, a computer scientist based in Zurich, Switzerland, has developed an application called PayFile which uses Bitcoin’s block chain to keep track of a user’s downloads, and pay for bandwidth automatically as they go. Hearn says PayFile is more a demonstration of what the Bitcoin ledger can do, rather than a fully fledged commercial service, but says it points to a future where the block chain will be used for all sorts of transactions.