James R. Davis
Posted - 02/01/2015 : 9:18 AM
Some of the attributes about Bitcoins that make it valuable - such as decentralization, security, trust-less transactions, and virtual anonymity - makes expanding their use beyond being simply another form of currency problematic.
But there is no arguing the fact that the technology behind Bitcoins - the blockchain' system - is here to stay and has value that will not be left unused and enhanced for larger roles.
Some of those existing attributes are just words in the minds of many, and are scarcely of interest to those who view Bitcoins as merely a store of value that is easy and cheap to transfer (spend). That's fine, of course, but we need to understand them if we want to expand usage.
Let's look at 'trust-less transaction', for example. All fiat currencies (US Dollars, Euros, British Pounds, etc.) rely on the integrity (trust) of the middlemen involved in making them useful. The bank teller, the broker, the dealer, PayPal (indeed, all payment systems) could steal or lose your currency while it's in their possession. You MUST trust these people and organizations in order to use your money.
No so when using Bitcoins. First, there are no middlemen. Second, there is no centralized maintainer of the Bitcoin ledger - it exists disbursed all over the world in verified identical copies. Third, a bitcoin cannot be counterfeit. Fourth, the identity of the person who can spend bitcoins is not a part of the spending process - only the owner of the bitcoin can spend it, whoever that is. And along those same lines, Fifth, ownership of bitcoins is indisputable - only the owner has the digital signature (key) required to spend them.
Trust of individuals or institutions is not necessary nor even a part of Bitcoin transactions - because of the underlying technology, the blockchain.
But in the financial world there are many transactions - most, in fact - where that technology doesn't fit. There are laws and practices in play that mandate, for example, that you know your customer (KYC) in order to stop money laundering, or the financing of terrorist organizations, or to insure fair and proper compensation.
If you owned a $1,000,000 bond that pays interest every three months, it is absolutely required that the issuer of that bond know who you are in order to make those payments, and it is also absolutely required (BY LAW) that each and every transfer of ownership of that bond is between a known individual or institution. In other words, WHO is information that MUST be maintained about ownership and the existing blockchain does not support that requirement.
Along comes Bitcoin 2.0 - and 'colored' bitcoins. Not exactly yet another cryto-currency, an enhanced version of the blockchain with all of its existing attributes along with some specialized enhancements.
A 'bond', or a 'title', or a 'copyright' colored coin, for example, could use the technology and enjoy all of its values just as easily as can a bitcoin.