The future of money: System of credit requires trust; Bitcoin bypasses it

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Posted: Tuesday, April 29, 2014 12:00 am

ATLANTA — They don’t take cash. At Atlanta Kick, they accept credit cards, debit cards and Bitcoin.

There is no register. Only a safe in the back and a 2-D QR code in the office that people can scan on their smartphones in order to shoot bitcoins to the gym’s digital wallet.

“If you don’t have a credit card, we don’t want you,” co-owner Jeff Thompson said, jokingly. “Unless, of course, you have Bitcoin.”

Not yet the norm, perhaps, but the martial arts studio is indicative of a surging interest in such cryptocurrencies. Thompson likes Bitcoin because it insulates him from employee theft or being robbed, he said.

Like serial numbers at the bottom of dollar bills, bitcoins are represented by unique identifiers on a public ledger called the block chain. Each time a unit of bitcoin moves from one digital wallet to another, its authenticity is verified and the movement is recorded in the ledger for all to see.

That’s a basic shift in transacting business: substituting transparency for trust.

For a karate mom paying at Atlanta Kick, the process is relatively simple. She opens an app, her digital wallet, on her Android smartphone and scans the QR code. Her wallet stores cryptographic keys that unlock her bitcoins, which she might have acquired through a bitcoin exchange or brokerage. The app transfers ownership of the bitcoins from her wallet to the gym’s wallet, the address of which is stored in the QR code.

Immediately, on a website such as Blockchain.info, an Atlanta Kick employee can see that an unconfirmed transaction has been recorded. In roughly 10 minutes, the gym will own those bitcoins and the block chain will be updated.

Underneath the hood, Bitcoin is basically a decentralized, worldwide, real-time electronic accounting system. Here, things get very geeky, very fast.

The open-source computer code that established bitcoins and many other cryptocurrencies is the work of an anonymous individual or small group. But the system is operated by a decentralized network of computer owners across the globe.

They use cryptography, the branch of math that has to do with codes, to “mine” new bitcoins (the digital currency is created at an ever-slowing rate determined by the original source code). The miners also authenticate and post each transaction on the block chain.

Jeff Costa, a technical salesman for Web security outfit Akamai Technologies, started mining bitcoins with a $1,500 starter kit he bought online early this year. He stores his rig in the basement of his home in Smyrna, Ga. As of the beginning of April, the system had rewarded him with about 1.78 bitcoins — just enough to pay the electric bill and let him trade in the digital currency.

“I think the spark in it, for me, is what it can be,” said Costa, 44. “Just the potential of this, for the secure transfer of assets.”

So, what is that potential? It’s about taking trust out of the equation.

Plastic money is 100 percent about trust. First, the card issuers determine that you can be trusted to pay your debts, then they verify that the person using your card is actually you.

With cryptocurrencies, the currency itself is authenticated each time it changes hands, and movements are tracked and recorded in public view. The identities and trustworthiness of those involved are irrelevant.

Operationally, there have been kinks — say, the collapse of the Japanese exchange Mt. Gox, which said it lost more than $450 million worth of bitcoins to hackers. But the underlying mathematical principles could fundamentally alter how business is done on every level.

The open-source code could be used to transfer ownership of cars, stocks and bonds from person to person, with little intervention by lawyers or other professionals. It could launch fleets of Uber-like enterprises, where goods and services are exchanged between individuals, without middlemen. It could engender decentralized corporations, with no hierarchy.

“I like the idea of removing trustthe need for trust,” said Marc Hochstein, executive editor of American Banker.

This isn’t to say that there aren’t downsides.

Most important, if you get robbed, you’re out of luck. There is no federal deposit insurance. Therefore, banks want nothing to do with Bitcoin.

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