MANY of us have heard of bitcoin. And many must be wondering if it’s the new currency of the future and that it makes a good investment bet, especially in times when other more “normal” currencies are volatile and our own ringgit seems to be depreciating. But then is bitcoin really legal? In many countries, Malaysia included, bitcoins are not accepted as a fiat currency.
Can it be hacked and so you risk losing all your bitcoins? But also basic questions like how do you actually buy bitcoins, where are they stored and what determines its value? And what uses do bitcoin have?
I don’t have any of those answers. I’m yet to find one credible point of reference to find these answers.
Here’s the little that I know. Bitcoins are a digital currency or a cryptocurrency, in reference to the protection it is afforded by a certain level of encryption. It is also run on a fully decentralised system, meaning that there is no central repository or administrator that creates or manages it, unlike the role of central banks in relation to fiat currencies. That said, a number of regulators have moved beyond bitcoin and are looking at issuing digital currencies backed by “real” fiat currencies.
Some online merchants (mostly ones abroad but also include big names like Microsoft and Dell) accept bitcoins for payments and volatile though it may be, bitcoins have appreciated in value generally since they were first introduced in 2009. Reports also claim that bitcoin has already surpassed the market cap of most reserve currencies. But bitcoin has also suffered from hacking and alleged usage by money launderers and terrorists. Regulators around the world are grappling with how to deal with bitcoins. Many are seeking to take the approach of regulating the “actors” in the bitcoin world, namely the buyers and sellers. Bitcoins are also just one type of digital currency. Others could overtake it in future.
But don’t let that take anything away from learning about the technology underlying bitcoins. That’s called blockchain or distributed ledgers and this technology holds the potential of positively impacting financial transactions the world over. Blockchain has been described as the most disruptive invention since the Internet.
And another simple explanation of bitcoin is like what email was to the Internet. It’s just one application of the blockchain. In a nutshell, blockchain transactions are recorded on a single unified ledger, with copies of that ledger maintained by computers belonging to all players in that network.
So this way, it is almost impossible to commit fraud as every single transaction needs to be verified by other players in the system. Blockchain is being trialed by financial institutions and start-ups for payments, cross-border remittances, trade finance and the clearing and settlement processes of stock exchanges.
This is happening globally because blockchain or distributed ledger technology is being pitched by its developers as something that drastically reduces transaction settlement time and costs, while improving security. But blockchain’s potential could spread across to many other industries.
The Financial Times recently reported that the technology is being explored for use in physical supply chains in Asia, where there are concerns over quality control, safety and security. The blockchain there is being used together with the Internet of Things sensors to create more secure food supply chains. The blockchain is also being used to record the heritage of diamonds and other luxury goods and to create immutable land registries in some countries.
Hence it is clear that blockchain should be the topic to get excited about. Don’t worry too much about the bitcoin saga.