DMGS Tech Brief: Cryptocurrency and Blockchain

By Danny Restivo

January 25th, 2017

For the first time in three years, the cryptocurrency Bitcoin topped the $1,000 mark, setting the stage for a banner year in 2017. The digital money hit $1,029 on January 2, according to Coindesk, a news organization that offers a price index for digital currenopengraphcy. Like all fiat currencies, Bitcoin’s value is determined by how much people are willing to trade. With the new price determination– as well as 12.5 bitcoins added into circulation every 10 minutes–the estimated value of all Bitcoins is $10 billion.

Launched in 2009, Bitcoin is the world’s most widely used cryptocurrency. It was created using an open-sourced software by an unidentified programmer, or programmers, in an effort to create a decentralized currency. A decentralized currency means that no single institution (such as a bank) or entity (country) controls Bitcoin. While similar digital currencies were launched during that same period, Bitcoin remains the dominant player and the most stable cryptocurrency investment. Its recent success has also boosted other digital money as well. The cryptocurrency Ethereum increased by 55 percent from December 28 to January 5, while Monero went up 27 percent during the same time period.

Part of Bitcoin’s rise, as well as the other cryptocurrencies, originates from blockchain technology. The technology provides a decentralized online platform to help facilitate transactions while maintaining anonymity for both parties. Whereas traditional transactions often involve a bank or financial exchange to verify and validate, blockchain technology allows Bitcoin users to account for all transactions. Using a number of complicated mathematical permutations and algorithms, a shared group of servers helps verify and validate transactions in a process called mining. Any server can help mine for Bitcoins and verify blocks within the chain of transactions while receiving bitcoins for doing so.

However, several high profile issues stemming from fraudulent transactions have plagued Bitcoins and other digital currencies. The most prolific occurred in Tokyo after a virtual currency exchange declared bankruptcy in late 2014. The exchange lost more than 100,000 Bitcoins, or more than $450 million for 750,000 customers. The company’s CEO, a Frenchman named Mark Karpeles, was ultimately charged with embezzlement before spending a year in Japanese jail. He’s now out on bail, but must remain in the country. Kareples’ incarceration comes on the heels of the arrest of two other Bitcoin pioneers. Charlie Shrem and Robert Faiella were both charged with laundering more than $1 million in Bitcoins to help make illegal purchases on the Silk Road, a now defunct black market site.

In 2013, Silk Road founder Ross Ulbricht was arrested for hacking, money laundering, narcotics trafficking and procuring murder. The FBI collected more than 144,000 Bitcoins worth more than $28.5 million before they were auctioned off. Ulbricht was sentenced to life in prison in May 2015 without the possibility of parole.

Despite issues related to criminal activity, Bitcoin has become a valued commodity matching the price of gold. Like other valuable minerals, Bitcoin’s worth stems from scarcity (only 21 million Bitcoins will ever be created, but they can be fractioned down to .000001). Bitcoin’s increasing popularity has come while countries like Venezuela, India and China place restrictions on their currency. Moreover, central banks in China, Russia, Canada and England have begun researching and implementing elements of blockchain technology.

video_wucIn September, a collaboration of Investment Banks and Tech Companies announced they would collaborate on a blockchain platform for trading. In October, other investment banks also announced that they were developing blockchain technology to create a shared ledger of all transactions while maintaining privacy for traders and transparency for regulators. Major investment banks have also been linked to technology firms that specialize in distributed ledger infrastructure, including Digital Asset Holdings (DAH), a blockchain startup that’s now working with the Australian Stock Exchange to replace its current system. DAH has already raised $60 million from Goldman Sachs, CME Group, Deutsche Borse, and Citigroup, among others.

While the financial sector is primed for blockchain investments, other industries like consumer manufacturing, healthcare and media expect to introduce the technology in some form.  “Companies in a variety of industries see blockchain’s ability to provide transparency, accountability and automation as huge benefits” says Brett Goldman, DMGS Manager of Special Projects. “However, Goldman adds, as the early developers and adopters of Bitcoin found out, blockchain technology is only as good as the people implementing it. therefore, companies and institutions that use blockchain must have a solid understanding of its technology, as well as its applicability before they will truly see an impact.”

For more information on Bitcoin and Blockchain Technologies, please contact us.

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