Introduc)on

to cryptocurrencies:
BITCOIN

NOVEMBER 10 2014

Content

1.

Introduc)on

2.

What is Bitcoin

3.

How it works

4.

Risks

5.

Legal status

6.

Future

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Introduc)on
Current value of 1 BTC 290 EUR

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Introduc)on

History of the technology

1997
Hashcash (Adam Back)

1998
B-money (Wei-Dai)

2005
BitGold (Nick Szabo)

2008
Bitcoin White Paper Bitcoin: A
Peer-to-Peer Electronic

Cash System (Satoshi Nakamoto)

2009
Bitcoin v0.1 formaPon of the
genesis block

Source (original version by): Innopay Cryptocurrency report 2014, Cryptocurrency. Exploring a
revoluAonary technology

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Introduc)on

Created by pseudonym Satoshi Nakamoto (2008)

Bitcoin: A Peer-to-Peer Electronic Cash System

Two major objec)ves:

1.

To create a digital currency prevenPng the double spending problem;

2.

To achieve this rst goal without a centralized third-party nancial insPtuPon.

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What is Bitcoin
Bitcoin deni)on in characteris)cs

Cryptocurrency, many similar features of money and currency

Digital units: represent value, are easy to keep anonymous, limited and scarce (will never exceed
21 million)

Open source soZware based on consensus

Cryptography controls creaPon of new digital units and transacPons

Decentralized: no central repository or single administrator

Peer-to-Peer network is used for the distribuPon of transacPons

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What is Bitcoin
What are the features of money ?

Medium of exchange

Unit of account

Store of value

Widely accepted

Uniformity

Fungible

Stable supply
Stable value

Divisible

Securable

Portable

Durable

Transferable
Hard to counterfeit

Other similariPes with construcPons such as asset, commodity and the gold standard

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What is Bitcoin
What is dierent when we talk about Bitcoin?

TradiPonal money is at currency

Possibility of increasing money supply

consequences: lower purchasing power and inaPon

Numbers that idenPfy for instance dollar bills are in ledgers at banks

Legal tender?

Worldwide sending and receiving

RelaPvely fast

Low transacPon costs

No chargeback's
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How it works
General aspects
Technology consists of the following elements:

Blockchain (the public ledger of all bitcoin transacPons);

Distributed by a Peer-to-Peer Network ;

Using Cryptography:

Hashing (double-SHA256, RIPEMD-160);

Proof-of-work (hashcash proof);

Dual key encrypPon.

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How it works
Prac)cal aspects

CreaPon trough mining

Storage in a wallet

Trading on BTC exchanges

ExecuPng payment transacPons

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How it works

Mining

Miners conrm wai)ng transac)ons;

by solving cryptographic calculaPons;

hashing, proof-of-work

reaching distributed consensus;

transacPons are then packed in a block and included in the blockchain.

ParPcipaPng in mining is also a lofery with reward incen)ves and this is how new bitcoin units are
created

Currently the reward contains 25 new bitcoins

Pool mining is combining resources in order to split the rewards

Mining pools >51% can be a threat

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How it works

Storage (i)

Soiware

creates a user account, the so-called Bitcoin wallet

assigning Bitcoin addresses to Bitcoin users;

recording the amount of bitcoins in each address;

hot storage (online) / cold storage (oine).

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How it works

Storage (ii)
TradiPonal bank account

Private informaPon, for which banks are responsible

One or few bank accounts

Bank account number is related to a person or user account

Bitcoin wallet

Public informaPon in trustless public ledger blockchain

MulPple addresses: wallet contains a record of the amount of bitcoins in each address

Bitcoin address is not Ped to a person or user account

Example: 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy

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How it works

Trading on BTC exchanges

Plalorm containing buy/sell orders bitcoins;

Possibility to exchange bitcoins in other (at) currencies;

Oien integrated wallet funcPonality.

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How it works

Payment transac)ons (i)

Soiware to facilitate Bitcoin transacPons;

enables users to send and receive bitcoins;

using a public/private key pair and digital signature;

publishes the associated transacPon in the network;

ConrmaPon of the transacPon in the blockchain.

Avoidance of double spending

Source image: Rhys Bollen 2013

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How it works

Payment transac)ons (ii)

Dual key encrypPon

Public key: 32 characters starPng with 1 or 3

6UwLL9Risc3QfPqBUvKofHmBQ7wMtjvM

Private key: 51 characters starPng with 5

5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF

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How it works
Payment transac)ons (iii)
Hashing simplied

Hashing is applying an algorithm to nd a short number (digest or signature)

Every Pme you apply a hash to certain data, you get the same hash number

Hashes are one-way. If you have the data, you can nd the hash. But, if you have the hash, you cannot
retrieve the data

Hashes are therefore useful for verifying data and in order to show the informaPon of the transacPon is
authenPc.

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Risks

Risks relate to

users;

non-user market parPcipants;

nancial integrity (money laundering, nancial crime);

other payment systems and payment service providers;

regulatory authoriPes.

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Risks
Risks of Virtual Currencies

Virtual Currency schemes can be created (and

their funcPoning changed) by anyone

InformaPon is neither objecPve nor equally

distributed

Payer and payee are anonymous

Insucient funds or VC units

Global reach (no respect for jurisdicPonal

boundaries)

No separaPon of accounts

Lack of probity

No complaint process

Not a legal person

Lack of access to redress

Opaque price formaPon

Lack of corporate capacity and governance

No refunds or payment guarantee

No reporPng requirements to any authority

Unclear regula)on

Interconnectedness to Fiat Currencies

Lack of deni)ons and standards

Not legal tender

No stabilizing authority

Inadequate IT safety

Source: European Banking Authority - Opinion on Virtual Currencies 2014

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Legisla)on
In general the regulatory status is focused on:

general nancial services regulaPon;

specic banking regulaPon;

currency regulaPon and legal tender;

tax legislaPon.

But how about civil and criminal law?

First wave of discussion related to Bitcoin regula)on focused on money transmission

Next major wave of Bitcoin regula)on will likely be aimed at nancial instruments, including securi)es
and deriva)ves, as well as predic)on markets and gambling (Brito, Shadab and Cas)llo 2014)

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Legisla)on

Europe

Dierent interpretaPons among member states and naPonal nancial supervisors

European Central Bank (October 2012):

it can reasonably be expected that the growth of virtual currencies will most likely conAnue
periodical examinaAon of the developments is needed in order to reassess the risks

European Banking Authority (July 2014)

recommends that naAonal supervisory authoriAes discourage credit insAtuAons, payment
insAtuAons and e-money insAtuAons from buying, holding or selling virtual currencies
recommends that EU legislators consider declaring market parAcipants at the direct interface
between convenAonal and virtual currencies, such as virtual currency exchanges, to become obliged
enAAes under the EU AnA Money Laundering DirecAve ()

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Future
Market Developments: Bitcoin Startup Ecosystem

Source: Coindesk - State of Bitcoin Q3 2014

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Future
Future aspects

Bitcoin is here to stay

Possibly in other forms (Bitcon 2.0, smart contracts)

Source of the original version: Innopay Cryptocurrency report 2014, Cryptocurrency. Exploring a revoluAonary technology

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Thank you for your aden)on

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