A recent article in American Banker reported Bank of America is filing 20 patents that are related to blockchain technology, including a cryptocurrency wire transfer system and cryptocurrency transaction payment system. Additionally, organizations like the National Retail Federation are covering the topic of cryptocurrency, such as bitcoin, and theorizing on how the benefits of new digital currencies will change how people shop and how money changes hands. Just what is cryptocurrency and how does blockchain technology influence the growth of Internet currency?

Decrypting Cryptocurrency

First introduced in 2009, Bitcoin is probably the most well-known type of cryptocurrency. It’s a way of exchanging goods and services outside of using a traditional currency that ties the transaction to a certain geographical location or centralized banking system. Cryptocurrencies are categorized as an alternative currency known as a digital currency for the very fact that they can work without having to undertake currency exchange rates.

Instead, one rate was established with the introduction of bitcoin. Now, there are extensive cryptocurrency specifications that have developed as the digital currency has evolved and an understanding has grown in terms of its applications and benefits. This includes the anonymity of this type of currency and the low risk of its ever being seized by some type of law enforcement agency.

Since 2009, other types of cryptocurrencies have been developed, including those known as second generation cryptocurrencies like Nxt, Ethereum, and Monero. These newer versions added to the anonymity, including stealth addresses. Some now report there are over 200 different kinds of digital currencies in use.

The fact that banks like Bank of America are filing patents indicates the level of seriousness the centralized financial institutions are placing on cryptocurrency and blockchain’s impact on national and global economies.

Blockchain as a Game Changer

The concept of block chain (or, blockchain) comes into play with digital currencies in that it serves as a database for transactions that occur with this alternative currency. Think of it as a ledger that tracks all the transactions in place of what a bank would do with a centralized system of transactions.

The ledgers are maintained by people known as “miners.” They validate the transactions and record the date on which this digital currency changed “hands.” The other aspect of their role is controlling the production of currency and the total amount in circulation to avoid the risk of hyperinflation. Wired Magazine did a great job of providing an in-depth explanation of blockchain:

Every few minutes a ‘block’ of all the transactions occurring over the Bitcoin network is created by a miner. Essentially the miner has created a verified transaction file which holds a copied record of all the transactions that have occurred in the network over the past 10 minutes….For his efforts, the miner is compensated in Bitcoins. This is where the math’s of the currency and the way that it differs from the normal fractional banking system kicks in. The total amount of Bitcoins that can ever exist is fixed at 21 million. As the quantity of money is fixed, the payment made to the miner is much like mining currency out of a reservoir.

As each transaction in every block is made at a specific time, each block is linked to the previous block of transactions. By grouping these blocks, we get what is referred to as the Block Chain. And since this grouping of blocks occurs as per the protocol dictated by the algorithm underpinning the creation of Bitcoins, this protocol is defined as the Block Chain protocol. This is where the TCP/IP and Block Chain protocols differ: TCP/IP is a COMMUNICATIONS protocol, whilst the Block Chain is a VALUE-EXCHANGE protocol.

Forever Altering Online and Offline Shopping and the Economy

As more consumers and businesses become accustomed to online payments and digital wallets just as they once had gotten used to migrating from cash and checks to debit and credit cards, central banks realize they have to address what is set to forever alter shopping and payments.

A complete transition, however, may be much farther into the future. More consideration is required for determining how data would be gathered to track and understand economic activity in order to steer it in a better direction should there be another downturn.

There is also concern over who would set policy related to this cryptocurrency, especially since the legal status of this type of currency varies by country and there is yet to be any standardized framework for its use and governance. For example, while Russia legally recognizes cryptocurrency, it currently does not allow any goods to be purchased other than with the Russian ruble. In the U.S., the Internal Revenue Service (IRS) refers to bitcoin as property rather than currency, making it subject to capital gains tax. Then, there is the concern over criminals that may use online currencies to launder money, avoid taxes, and commit fraud.

Despite the unresolved legal and economic issues related to cryptocurrency, its popularity continues to grow. Certain perceived benefits are already attracting attention, including no transaction or third-party fees that are common with purchases made between countries, including those transacted online. Not having these fees or the complexity of fluctuating prices due to differences in currencies used can increase the potential for exchanging more goods and services on a global basis.

Like consumers, the merchants selling the goods also have it easier with cryptocurrency. All that is required to accept this currency is a digital wallet, reducing the need for complex and expensive payment processing systems. Consumers also use a digital wallet to store their cryptocurrency for future use as well as use this wallet to copy and store QR codes for future purchases with merchants. Admired brands like Dell, Expedia, and Microsoft are just a few of the companies accepting bitcoin payments while Bitcoin ATMs are popping up in more places around the world.

As Deborah Baxley, Principal for Capgemini, noted, “We have evolved from information to value exchange from the World Wide Web to the Internet of value.”


I'm Chalmers Brown and I'm the Co-Founder and CTO of Due. I'm a big fan of technology and building financial products that help people better their lives.

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