Monday, April 13, 2015

Bitcoins, blockchains, and bolstering e-payments: Cryptocurrencies and the future of financial research and development

By Bill Maurer and Taylor C. Nelms

On April 2, a group of academics and payments industry experts convened at the University of California, Irvine under the aegis of the Institute for Money, Technology and Financial Inclusion to discuss the present and future state of cryptocurrency research and development for money, payment, law, and more. The Director of IMTFI and UCI’s Dean of Social Sciences Bill Maurer discussed his new National Science Foundation-supported research project, and Donncha Kavanagh (Professor of Information and Organization at University College, Dublin, who heads the project "Coding Value: New Money for the Digital Society") and Mic Bowman (Principal Engineer at Intel Labs) both reported on their respective teams’ ongoing research. Those physically in attendance were joined online by a group of scholars from University College, Dublin, and elsewhere.

When Bitcoin—the distributed, open-source, online network for transferring value—was first introduced in the late-2000s, it was talked about as a new kind of money. But as the ecosystem of institutions and services has evolved around it, Bitcoin itself has changed: rather than as money, Bitcoin is now often talked about as a payment system or, even more broadly, as an infrastructure or protocol for a variety of legal or law-like activities, from notarization to title management. Participants at the IMTFI convening discussed the implications of these changes for contemporary challenges in the worlds of payment, finance, law, and international development. These included: microtransactions, identity management, notarization, auditing, and G2P payments (including for internally displaced persons).

A blockchain is a distributed database containing records of all transactions taking place in the system of which it is a part. It is not controlled by any central authority, but is instead verified by the network of peers sustaining it. In this way, it depends on a community of users in order to function. This makes it robust, and also lends it several advantages over traditional payment services. Already, startups like Bitpesa and developers like Kipochi are exploring the use of blockchain systems for remittances, as well as ways into integrate mobile money systems like M-Pesa. Participants discussed the possibility of blockchain-type systems (Bitcoin or otherwise) working to create digital liquidity for those people living a cash-only existence. Participants were especially interested in the potential role of such systems in developing world contexts lacking built-out electronic payments infrastructure.

The question of infrastructure, however, loomed large: without electricity and Internet access, blockchain systems are impossible to sustain. Participants at the convening also discussed the challenges to community due to increasing centralization of Bitcoin transaction verification by an ever-diminishing number of “miners” (now about 6,000; projected to decline to around 3,000) and large, consolidated “mining pools” (9 of which control 78% of market share as of 4/11/15).

Participants also discussed the potential of blockchain systems to solve low-level legal problems of great significance in the global South, such as land titling and property registration, as well as delivering foreign aid. The “public ledger” qualities of blockchain systems may hold potential here, even more than in the money transfer domain.

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