A lot of people have heard of BITCOIN.
This “cryptocurrency” or “digital currency”, as it is referred to by those in the know, was invented in 2009 by Satoshi Nakamoto, as yet unidentified (some believe that the name refers to a group of programmers). Unlike most traditional currencies, which are managed by a bank or central organization, Bitcoin works without a central repository or single administrator. Instead, BITCOIN uses a distributed database between the nodes of the system that keep track of transactions (known as the “blockchain”), and employs cryptography to manage aspects relating to production and use of the currency, such as new bitcoin creation. This cryptocurrency is held in digital wallets, uniquely identifiable by an alphanumeric address, and the underlying infrastructure allows the peer-to-peer transfer of BITCOINs between users’ wallets. The blockchain transaction ledger contains the history of all bitcoin transactions, starting from the address of their creator to the current owner. Although the blockchain will expand over time, Nakamoto designed the system to render a smaller version of the blockchain available, showing the details of just a few transactions but still independently and fully verifiable.
One of the distinctive features of this currency is that at its inception, the inventor(s) set a monetary policy whereby there would only ever be 21 million Bitcoins in total.
According to some financial experts, this makes Bitcoin a deflationary currency, which would incentivize users to hold onto it rather than spend it once all of the bitcoins are in circulation. Bitcoins are created by network nodes (“miners”), which validate transactions. A new bitcoin is created as a reward for the miner who is the first to solve the “cryptographic puzzle” associated with a transaction by verifying it. Thus a new bitcoin is created with each transaction, up to the maximum limit of the units of exchange.
This is what motivates various technical experts from a large number of countries to maintain the cryptocurrency’s IT infrastructure. Many companies have studied the way this currency works, and it has spawned numerous “follower” projects, differing from it and presenting themselves as alternatives (Bitecoin, Ethereum, Dodgecoin, etc.). But to date none of these has troubled BITCOIN’s supremacy. As is often the case, BITCOIN benefits from the advantage (although therefore also the technological limits) of being the first on the scene.
Big institutions (central banks, financial institutions) have long studied the blockchain, in other words the technology on which BITCOIN was built. It was recently announced that several groups are examining projects that will use the technology underpinning BITCOIN to change their transaction systems, thereby cutting costs. In the patent sector, there is clear interest in this technology, if we consider that in 2015-2016 more than 50 patent applications relating to BITCOIN alone were published, and to date more than 500 patents have been filed for digital currencies (Bitcoin & Co.). American case law (U.S. v. Murgio et al, U.S. District Court, Southern District of New York, No. 15-cr-00769) recently saw a judge rule that BITCOIN qualifies as “money”, while in the past the legal system tended to class BITCOIN as a traditional “commodity”. Tax agencies have passed decrees and set rules concerning VAT exemption for transactions involving cryptocurrencies (see the ruling of 10.22.2015 by the ECJ, Skatteverket v. David Hedqvist).
However, BITCOIN is frowned on by the financial world. The U.S. Securities and Exchange Commission (SEC) recently denied a request to list an exchange-traded fund (ETF) investing in BITCOIN. According to the SEC, BITCOIN presents a new set of risks to investors given its limited adoption and a number of massive cybersecurity breaches affecting holders of the currency.
Nonetheless, the number of merchants and vendors accepting BITCOIN as payment is constantly on the rise. Last but not least, a lot of countries including Italy have already set up ATMs for exchanging cash for BITCOINs (although perhaps ATMs are just a way of bringing a “native digital” currency that exists and is used on the internet closer to the real world).
Yet these are important signs of the role and importance that cryptocurrencies have taken on. Some IT experts believe that the “blockchain”, not the virtual currency itself, could even bring about a revolution that will in the coming years radically shake up not just transactions and payment systems, but also traditional models for databases.