Bitcoin technology has the potential to revolutionise the way we buy and sell property, enforce legal documents and even place bets, according to a new report from financial services and investment firm Wedbush Securities.
The system of decentralized trust, meaning that there is no central authority, that underpins bitcoin could have applications beyond the payments world that is most commonly associated with the cryptocurrency, write the report's authors Gil Luria and Aaron Turner. The report reads:
"We see the potential for bitcoin technology to digitize and decentralize trust. The implications of eliminating the need for centralized trust may go beyond payment networks to areas such as securities markets, sports gambling and even legal contracts."
The report, titled 'Digitizing Trust: Leveraging the Bitcoin Protocol Beyond the "Coin"', cites the Bitcoin Foundation's October decision to allow meta data to be embedded in the blockchain as opening the door for people to "leverage the blockchain protocol in other ways beyond traditional financial transactions".
At its core, bitcoin is merely a way of recording transactions without the need for a central authority to confirm or verify those transactions.
The bitcoin protocol creates a digital ledger, called the "blockchain", tracking each and every transaction on the network. That ledger is stored and updated not by a central bank, but by every single person who downloads the bitcoin software.
Therefore it is decentralized. Whenever a new transaction occurs, the record of that transaction propagates through the network and everyone updates their ledgers.
This distributed and decentralized system, backed by cryptography, does away with the need for trust in the "having to take someone's word for it" sense – everything can be checked and verified digitally on the ledger.
(Of course, this is a simplified explanation and not the whole story. This video gives an in-depth view of the bitcoin protocol.)
The bitcoin blockchain, for a long time, only contained data about transactions, but in October 2013 Bitcoin's lead developer Gavin Andresen "reluctantly" allowed other data to be embedded into the blockchain. He said:
"The idea is to give people a way to do what they clearly want to do (associate extra data with a transaction that is secured by the blockchain), but do it in a responsible way that strikes a balance between 'you can put whatever you want into the blockchain"'and 'you will have to be tricky and inefficient to get your data in the blockchain'."
So potentially, a person could store data about a legal contract there. Here's how Gil Luria explains the concept:
"If the contract is in the blockchain and can be triggered by data feeds there is less need for lawyers, debt collectors etc. If the ownership and financing terms of a car is on the blockchain, and the car can only be started by the rightful owner, you don't need debt collectors. The car will not let the driver operate it if they have not paid their car payment."
The current bitcoin software only allows developers to add 80 bytes of other data to transactions, so the argument is less that bitcoin right now could become a system for enforcing legal documents, but rather that a bitcoin-esque system of decentralised trust could prove powerful in domains outside of traditional financial transactions.
"We believe the protocol will be leveraged beyond financial assets and fulfill the role of trusted intermediary in a variety of settings, including property, legal documents, escrow and sports betting," write Luria and Turner in the report.
Regulation and investment in 2014
According to the report, this level of investment will continue in 2014, allowing new innovation in the bitcoin space and the creation of technologies that will make bitcoin truly accessible to the mainstream, just as the creation of web browsers opened up the internet to new audiences.
"VCs that are not currently involved are looking for ways not to miss the trend," says Luria.
Standing in the way of innovation is the increasingly hostile regulatory environment. China, India and the United States have all taken steps to restrict and regulate the operation of bitcoin businesses.
"I think the regulatory environment is more set than it seems," says Luria, warning against undue optimism that regulators will change tack in 2014.
But with the bitcoin market burgeoning – BitPay says it gets 400 new merchant requests a day and Wedbush's report estimates over $200m was spent on bitcoin mining equipment in 2013 – it remains to be seen whether or not these countries are shooting themselves in the foot by clamping down on bitcoin.
"Innovation and innovators gravitate to the country with the most accommodating regulatory environment," notes the Wedbush report.
And now, with the potential for bitcoin technology to change not only payments and money transfers but other legal arenas, the stakes have never been higher.