Bitcoin prices have dropped almost 60% since January,
outpacing the Russian ruble. Critics say that’s proof digital currency has
failed. Bitcoin’s price is irrelevant to the key question of whether the
underlying technology will disrupt finance. There are many signs it will.
Bitcoin is much more than just a currency. Investors from
Silicon Valley to Wall Street are now pouring money and expertise into what
they view as an adaptable technology platform. Software developers anywhere can
use bitcoin’s open-source code to create specialized applications that let
businesses undertake commercial exchanges without using middlemen. These
applications threaten to make redundant many services provided by banks,
foreign-exchange houses, escrow agents, clearing houses, notaries public and
even lawyers.
Of course, none of that guarantees that bitcoin will
succeed. Detractors will rightly argue that householders won’t save or transact
in a unit of exchange whose value fluctuates wildly. Indeed, while bitcoin
transactions continue to rise, and even though a growing list of merchants
accepting bitcoin now includes Microsoft, Expedia and Dish
Network, digital currency’s portion of global commerce remains minuscule.
But it doesn’t matter that mom and pop aren’t comfortable
with bitcoin. What matters is whether the exploding software innovation around
cryptocurrency leads to solutions that allow corporations and governments to
derive benefits while protecting themselves from risks, including the
volatility. The vision that many in Silicon Valley have is that bitcoin, or
perhaps some clone of it, will work in the background of the global economy.
Mom and pop won’t even know it’s there.
Balaji Srinivasan, a partner at venture-capital firm
Andreessen Horowitz in Menlo Park, Calif., likens bitcoin’s current status to
the early days of Linux, whose open-source operating system initially sought to
compete with Microsoft’s Windows on personal computers but eventually became
the leading operating system for enterprise servers.
Mr. Srinivasan’s firm, which was co-founded by Netscape
pioneer Marc Andreessen, is one of dozens that have invested a total $311
million in bitcoin startups this year, according to a tally by news site
Coindesk. That’s up from $93 million in 2013. The names behind these deals read
like a who’s who of Internet history: Tim Draper of the Valley’s legendary
Draper family, Reid Hoffman of LinkedIn fame, Yahoo founder Jerry
Yang and many others.
What gets these people excited is bitcoin’s “decentralized”
infrastructure: the public, distributed ledger known as the blockchain, which
is updated and maintained in real time by a network of independent computers to
generate an ongoing consensus on the veracity of its data.
Bitcoin’s fast, low-cost system for authenticating
information not only makes it possible to make payments without fees going to credit
card companies, banks, payment processors or exchange houses, but also to
decentralize many other economic functions. Since any information can be
embedded into the blockchain ledger and because the core software is an open
platform, startups are building myriad “Bitcoin 2.0” applications based on the
same principle: blockchain-based ride-sharing services, personal ID systems,
database management and asset registries, even the wild idea of companies run
not by human managers but by software programs.
Wall Street is in on the act, too. Senior investment bank
managers are joining bitcoin startups. Hedge funds are trading digital
currencies. Ex-traders are building high-tech platforms and derivatives to
better manage digital currency’s volatility. Bitcoin’s price is now quoted on
Bloomberg terminals. Some banks are using Ripple Labs’ cryptocurrency network
for international transfers. Some Federal Reserve district banks are looking at
how the technology might streamline the Fed’s interbank payments system.
Excessive government regulation could also strangle
cryptocurrency, of course. But smart regulation could legitimize it. Last week,
New York Superintendent of Financial Services Benjamin Lawsky unveiled
details for a revised “BitLicense” that was welcomed by many in the bitcoin
community for promoting innovation.
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