24 July 2014 / Institutional Investor – By Mark Pey: “By now I think we can agree that the absence of an official, rules-based, cooperatively managed monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth.”

— Paul Volcker, Bretton Woods Committee, May 2014

This quotation, from the man many economists and analysts consider the best central banker of our time, brings up an interesting point: We would not be thinking about Bitcoin in the first place if our current monetary arrangements were on a sustainable trajectory. The question of whether or not there is a better way to streamline both domestic and cross-border payments is gaining at least legitimacy, if not currency. With this in mind, it’s worth investigating what Bitcoin has to offer.

The first thing to understand about Bitcoin is that it is not just an improvement on existing payments and monetary systems. It’s a brand-new invention. Analysts and skeptics alike get tripped up in trying to apply conventional analytical thinking to this completely new technology: “It’s a currency and should succeed or fail because of X; it’s a commodity and should be priced like Y; it’s a technology and should be adopted like Z.” In actuality, it’s all these things — and more. It also works as an asset registry and can be likened to a seat on an exchange. It’s a software protocol — just think how much HTTP would be worth. And it’s a global payments network, comparable to a company like Western Union. Because Bitcoin is a new concept that transcends several long-standing boundaries, it requires us to devise some new ways of thinking about it.

Another important characteristic of Bitcoin is that it is decentralized. Bitcoin is a collaboration of tens of thousands of individual computers acting in unison — a beehive of computing from the bottom up, with no need for a central administrator. For starters, this means that there is no bank at the top of the hierarchy: everyone is the bank. Similarly, since Bitcoin’s value accrues from the users themselves as they agree to transact on a free market, there is no need for an issuing monetary authority. If other decentralized systems are any guide, the currency may be difficult to regulate. Movie sharing, for example, now makes up 25 percent of all Internet traffic.

The next thing to consider is that, unlike traditional payments systems, Bitcoin is — like the Internet itself — an open network. This makes it a level playing field for new development and allows what Vint Cerf, recognized as one of the fathers of the Internet, has called “innovation without permission.” Launching a new web site doesn’t require securing anyone’s permission. Similarly, when a Bitcoin developer wants to embed a new payments capability inside a device or an application or a web site, no one needs to give a formal okay…… Read more

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