coin center at eu science and technology options assessment meeting jan 25, 2015

Bitcoin and

BlockchainsBackground for Policymakers

Coin Center: Who are we?

We are a Washington, DC based non-profit

research and advocacy center.

Full time professional

staff.

Support from key industry

players and venture

capitalists.

Coin Center: Who are we?

Please visit us at

Coincenter.org for

full access to our

research.

Bitcoin: Network and Asset

Bitcoin is both a network protocol and a new

scarce asset that can be ‘owned.’

qua network

Bitcoin

qua asset

bitcoin

Bitcoin: Network

Like the Internet there is no single institution or company

that controls bitcoin. It is made up of several thousand

computers working

together and speaking the same

language or “protocol.”

Bitcoin: Network

Individuals or companies can join the network merely by

running free software on an Internet-connected machine.

Bitcoin: Network

There is are many versions of Bitcoin software, however a

group of developers, called “core devs,” build and maintain

a “reference client.”

Lead core dev,

Gavin Andresen

Bitcoin: Network

Anyone can build their own software based on the

reference client, and as long as it follows certain

“consensus rules” it will be compatible

with the larger Bitcoin network.

Bitcoin: Asset

A bitcoin is a chain of digital signatures stored in a public

ledger called the blockchain. One owns a bitcoin rather like

one owns a house.

The ‘owner’ of the house is whoever is

listed on the final deed in a chain of

deeds held by a public registry.

That person can sign her deed over to

someone else, transferring ownership.

The ‘owner’ of a bitcoin is whoever is referenced, by a pseudonym, in

the most recent digital signature in a chain of signatures.

These signatures are held in a public ledger, called the blockchain.

That person is the only person who can sign her bitcoin over to

someone else, transferring ownership. The network would reject any

other signature because it would violate the software’s consensus

rules.

Public Address:

3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy

Public Key:

0488ff723a55ae8f46d9decf66c10a249adb59ac91195adee879ecb5944ea7f5098dd9e193c2172047e6eacb6ddd

524c77ee5669b2f69bbfb27fc03d717d657195

Private Key:

e6edcf30220499bd034a7f4ebbadd4d62c89995c01157067983b4f1f26b58111

A Bitcoin Pseudonym The address where you can receive

bitcoins.

The key that you must have in order to

send bitcoins from your address.

Keys are linked because of a cryptographic function

called ECDSA. This function generates to verifiably

matched keys. It’s the same mathematics used to

secure communications on the Internet.

How the ledger, or blockchain is created and updated.

Special members of the network, called miners, compete to solve a

difficult but open ended math problem. Think of it like a bunch of

schoolkids racing to see who can be the first to flip a coin heads-up

ten times in a row.

The first one to solve the problem can write a new block in the

blockchain, recording all of the transfers that were requested of the

miner in the last ~10 minutes. As a reward, they can also write a

transaction to themselves for 25 new bitcoins.

A3R34AF sent 4 bitcoins to SF345L

FS399G0 sent 2 bitcoins to 39VB09

CI6LE863 sent 3 bitcoins to MD39N3

Winner of this block sends 25 bitcoins to

himself, VV1658D

How the ledger, or blockchain is created and updated.

How does the network agree?

When a miner announces to the network that she solved a block,

the other miners check to see if it is “valid” according to the

consensus rules of the software.





himself, VV1658D

Did these addresses have enough Bitcoin to fund the transfer?

Did the miner give herself the appropriate reward?

What happens next?

If the block looks good, miners will begin working on solving the next block (so that

they can get the next reward). The next block is built on top of the last one by

incorporating it, as an input, into the next math problem to be solved. This is why the

ledger is called the blockchain.

G3R34AF sent 4 bitcoins to SF345L




himself, VV1658D





himself, VV1658D

43R34AF sent 4 bitcoins to SF345L




himself, VV1658D

H3R34AF sent 4 bitcoins to SF345L




himself, VV1658D

Why is this secure? Recall that solving one block was difficult, like flipping a coin and it landing on heads 10 times in

a row. Therefore for a person to try and rewrite the transaction history going back 10 blocks

they’d have flip a coin heads-up 100 times. The odds are so bad, that it’s effectively impossible.

This means that a transaction recorded more than a few blocks back is indelible.

G3R34AF sent 4 bitcoins to SF345L




himself, VV1658D





himself, VV1658D

43R34AF sent 4 bitcoins to SF345L




himself, VV1658D

H3R34AF sent 4 bitcoins to SF345L




himself, VV1658D

One can interact with the bitcoin network with

local software, or through a business that

specializes in:

Bitcoin Businesses

Storing and Securing

Your Bitcoins.

Converting fiat currency into

bitcoins and vice versa.

Helping Merchants accept

Bitcoin as payment.

Only need:

Free software.

Internet connection.

Why is Bitcoin useful? Any other form of electronic money transfer involves trusted intermediaries. For the transfer to work,

both parties must have a relationship with the same intermediary, or multiple intermediaries must

have relationships with each other. Any of those intermediaries may charge fees.

Bitcoin works even for those who don’t have access to a banking relationship. Also, with no

intermediaries fees are lower.

Why this useful: Remittances “The current fee charged by the Bitcoin network can be as little

as zero, but also has a fixed maximum fee of 0.0001 bitcoin per

transaction, or about 4 US cents. With smartphones in emerging

markets selling for as little as $35 US, this means that even very

poor citizens in developing nations can receive bitcoins directly

from their relatives working abroad without paying the fees

associated with traditional money transmitter businesses.”

Attorney and Coin Center Contributor Brock Cusick

Why this useful: ID Theft. “By substantially reducing the number of parties that the

consumer must trust, Bitcoin can mitigate the danger of identity

theft and fraudulent charges.”

Executive Architect for Innovation at IBM UK and Coin Center

Contributor Richard Gendal Brown

Why this useful: Smart Contracts

“By using a smart contract, parties commit themselves to be bound

by the rules and determinations of the underlying code. Doing so in

principle removes the potential for parties to have a dispute: both

parties are held to whatever outcome the smart contract determines.

In his seminal 1997 article, legal scholar and technologist Nick

Szabo described what may happen to someone that breaches a smart

car lease: ‘if the owner fails to make payments, the smart contract

invokes the lien protocol, which [automatically] returns control of

the car keys to the bank.’”

Professor of law at NYLS and Coin Center Fellow Houman Shadab

● Licensing

● AML / KYC

● Consumer Protection

● Securities Law

Regulatory Issues

● In countries and states where money

services businesses must be licensed. Do

bitcoin businesses need a license?

● What about non-financial uses of Bitcoin?

Licensing

● Is Bitcoin anonymous? Not really.

● How can Bitcoin businesses fulfill their

recordkeeping obligations when they may

deal primarily with pseudonyms?

AML/KYC

● How do we stop another exchange from

disappearing with customer funds (Mt. Gox).

● How can technologies inherent to bitcoin,

like multi-sig transactions, and cold storage

help protect consumer funds?

Consumer Protection

● As a means to creating an authoritative

record of ownership, Bitcoin or other

blockchain technologies can build digital

clearinghouses.

● If a company promises to redeem a bitcoin

or other crypto-token for equity, do securities

regulations apply?

Securities Law

Questions?

For more information visit coincenter.org

coin center at eu science and technology options assessment meeting jan 25, 2015

Technology

quantity of bitcoin

larger bitcoin network

versions of bitcoin

particular bitcoin holding

public addresses

public ledger

public record

public registry