Technology news

27 November 2013

Bitcoin moves beyond mere money

BITCOIN is money – people can use it to buy anything from pizza to plastic surgery. The meteoric rise of the online currency has caused everyone from financial regulators to law enforcement and the US Senate to sit up and take notice.

A growing number of computer scientists think this is just the start. They are convinced that Bitcoin’s real value is not in providing the world with a currency free from government intervention, but in the technology that underpins it: a secure system of verifying transactions that could transform the way we exchange goods and services around the world.

The secret to Bitcoin’s success is the “block chain” – a secure digital ledger that records every single transaction of the currency. Those transactions are then mathematically verified by the computers of Bitcoin users around the world. Anyone who holds Bitcoins also has an exact copy of the block chain, making it virtually impossible to create a forgery. This eliminates the need for trusted third parties, like PayPal and Visa, when making financial transactions.

But the block chain could be used to move more than just money. Take the buying and selling of real estate, for example. In a statement before the US Senate Committee on Banking, Housing and Urban Affairs on 19 November, Anthony Gallippi, CEO of Bitcoin payment firm BitPay, described how co-opting the block chain could do away with the gaggle of fees and legal manoeuvrings that accompany home sales.


“The biggest upfront costs for consumers trying to buy a home are the closing costs, which include fees for deeds, titles, stamps, title insurance, and other redundant tasks to record the sale in different record books,” Gallippi said. “Bitcoin can replace thousands of dollars in closing costs with a single transaction that costs 5 cents. By reporting deeds and titles on the block chain, the information would be public record forever, for pennies, and eliminate the need for title insurance.”

“Bitcoin can replace thousands of dollars in charges with a transaction costing 5 cents”

A few researchers have already done something along these lines, by “colouring” Bitcoins. Colouring is a way of digitally labelling a Bitcoin, or a fraction of one, with information about a transaction. When the labelled coin changes hands, it gets indelibly recorded in the block chain.

Amos Meiri, a computer scientist with the social stock-trading firm eToro, based in Cyprus, says he ran a proof of concept last year. He transferred a Bitcoin, coloured to represent a sum of gold, through the block chain. Through an organisation called Colored Coins, Meiri and others plan to launch a beta version of software that executes this process in the next few weeks.

“We basically put another layer above Bitcoin,” Meiri says. “Instead of holding the currency, you’ll be able to hold and trade gold, Apple stock, your own car…”

Mike Hearn, a computer scientist based in Zurich, Switzerland, has developed a similar application called PayFile which uses Bitcoin’s block chain to keep track of a user’s downloads, and pay for bandwidth automatically as they go. Hearn says PayFile is more a demonstration of what the Bitcoin ledger can do, rather than a fully fledged commercial service, but says it points to a future where the block chain could transform commerce by being used for all sorts of transactions.