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How Bitcoins Save the Day

Bitcoin is in fact a digital asset that acts like ‘money’ (G-20 said so), but it somewhat behaves differently than what we currently deem as ‘money’. It’s more like ‘money’ on steroids as it’s a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds. Bitcoin is like the screwdriver that fixes your loose screw. What Bitcoin offers is like the complement of what real money is lacking thereof:

Cryptography and Verification

Basically, the ownership of Bitcoins provides users the ability to move Bitcoins in the complexly-interconnected system, and as such these tokens are actually short of intrinsic value. They derive their value from the utilization in making payments within that interconnected system and also because there are enough people to believe in the future value of it (Badev & Chen, 2014).

Organizations or individuals that possess Bitcoins are able to carry out business using these coins right away, as opposed to traditional payment systems that use mediators such as banks, processors, and networks. This is done through transactions that are sequentially recorded in a public ledger, known as the block chain, and is within reach of all network users, therefore bypassing the banks and middlemen altogether (also called P2P).

Bitcoin is acknowledged as a cryptocurrency due to its utilization of cryptography to deal with payments and confirm transactions and additionally to restrain the Bitcoin supply. There are two essential cryptographic procedures upon which Bitcoin creation and usage rely on: Firstly, digital signatures authorize users to execute accurate payment orders between parties, and cryptographic hash functions perform to impose discipline in entering data into the transaction records in the public ledger.

Bitcoin’s creation is additionally protected by the utilization of a digital timestamp, which demonstrates that some specific information – in this case, a digital document as confirmation-of-work – prevailed at a specific point in time. These Bitcoin timestamps can be used to record a group of transactions where a digital currency occurred (Zmaznev, 2017).

Decentralization

The Bitcoin software is within our reach and can be operated by anyone, anywhere in this world. This is because since the creation of new Bitcoins and the management of transactions in the form of Bitcoin are both operated by that same software, both payment processing as well as recordkeeping are carried out in a vastly distributed and decentralized way. This decentralization is at the core of what furnishes Bitcoin with some of its greatest advantages.

What makes Bitcoin so profound is that it can be explained as a “decentralized” currency. Most currencies gain their value from the fact that a national government had claimed that it has value and in some cases, is backed by something significant like gold. Most currencies can be called “centralized” as they are centrally-controlled and regulated by a government’s central bank. However, the same cannot be applied to Bitcoin.

Bitcoin exists only in computerized form, has no central control, and the computer processing power needed to generate them is the main object that lends them value. In 2008, a man under the pen name Satoshi Nakamoto envisioned for a currency that can only exist on the web, beyond the impact of any bank or national government. In 2009, he again secretly released an open-source programming software which permitted anyone with a sufficiently capable computer to start mining Bitcoins. After the mining of Bitcoin, online transactions and exchanges of the decentralized currency would be logged by a shared system of computers, enabling users to organize the currency’s virtual check book as a group.

Lower Transaction Costs

Consequently, huge transactions will cause investors’ returns to be diminished to a significant percentage, which affects investment decisions. (Oh wait, have we not mentioned foreign transaction fees as well?)  Such costs are seemingly inevitable due to the presence of financial intermediaries and centralized entity, which thankfully Bitcoin does not have (decentralization).

Though Bitcoin has commission fees, it only amounts to 0.1% of the transaction amount (Bunjaku et al, 2017), something that is lower than any other system in existence. Fees are charged when there’s a transaction, and are usually paid to Bitcoin miners who successfully process and record transactions into a virtual file or ledger (blocks). However, it’s just like digitally hailing a taxi (think: Grab) during peak hours, the more you tip, the more likely your booking will get confirmed! Since each “block” can only carry 1MB (megabyte) worth of transaction data, spaces are limited, and miners are strictly profit motivated, they want the best bang for the buck, hence they would pick and choose transactions that pay well relative to its complexity.

Unlimited and Absolute Transactions

Every wallet holder can pay Bitcoin to anyone, anywhere and in any amount, as long as they have a computer and internet connection. Bitcoin transactions cannot be controlled or prevented, thus one can make transfers anywhere in the world wherever another user with a Bitcoin wallet is located (Bunjaku et al, 2017). Bitcoin transactions are also absolute, which means that it can never be reversed once payments are made.

In contrast to real banks, there’s a limit on how much money one can transfer to another party through bank accounts. Also, if the government or banks have certain reasons that they believe you would not need to know at all, they can stop all transactions as they deem fit, and there’s nothing you can do about it.

Anonymity of Bitcoin

Real money is often deposited in the bank. As such, both the bank and the government will always know your worth. Such “invasion of privacy” occurs even in cash transactions notably through banks or online banking, where all the bits of information regarding the sender and receiver of the transaction is known to the bank or any government officials who would like to have an “investigative” look.

On the other hand, Bitcoin provides a theoretically complete anonymity for all its users. Any company or user can create an infinite number of Bitcoin addresses without reference to name, address or any other information. Moreover, the creation of such addresses does not require any submission of personal information to anyone, as compared to banks which require all of the above for even creating a personal bank account. Also, the peer-to-peer characteristic of Bitcoin allows Bitcoin transaction data to be transmitted and forwarded by random redistribution points or communication endpoints (nodes) in the network. This creates the uncertainty that whether the transaction data they received was created by the node they had connected to, or if that node merely forwarded that data (Wirdum, 2015). Subsequently, it makes tracking down the real identities of both parties in a transaction almost close to impossible. In the case of the user’s identity being discovered, its cause is usually of unintended human negligence or errors rather than the loopholes of the technology. Some examples include users not using VPNs (virtual private networks) to avoid detection of IP addresses, publishing their Bitcoin addresses in public spaces like websites or social media and not using a different Bitcoin address for each different respective leftover transactions that makes it hard to trace relative to time.

The anonymity that Bitcoin provides further extends to the security of one’s personal data which prevents fraud. This would be obvious considering that Bitcoin transactions never require submission of any personal data. Compare that to credit cards which most often than not, customers are unavoidably required or prone to enter their card number, expiration date and codes during purchase, securement of offer deals and “maintenance”.

Summary: FinTech and RegTech.

The bad thing about Bitcoin is that you might will not get that free rice cooker you’ve always been dreaming of that sometimes come along with your newly registered credit card.

FinTech is the “buzzword” within a wide range of different industries. It refers to the use of technology across all financial service functions. For instance, the simple task of replacing paper-based processes with software and applications is an example of FinTech at work. Industries such as insurance, loans, mortgages, regulations and cybersecurity are just a few in embracing FinTech application at the moment before it spreads to more industries to come. Every cause will have a reason, and every invention is of the hope that its purpose surpasses or rectify the downsides of the preceding invention. Bitcoin is just one of the many products of FinTech, where it attempts to solve the problems we are currently facing in the banking industry.

In this progressive era filled with bustling modernity, innovation technology is perhaps the drive to mankind’s continuous evolution. Society strives to function under the influence of evolving technology that shapes our way of life, including how we do business and transact value or services between one and another. Whether we like or not, FinTech is and will be the pioneer of modern Finance, embarking its embracers on a journey that revolutionises the way we view and conduct financial business. Therefore, it is imperative to know what FinTech has to fully offer, and the challenges it brings. More research and the awareness of such a function should be known to the public for the benefit of the nation and its economy. Future research findings ought to include (but are not limited to) block chains, smart contracts, Initial Coin Offerings (ICO), machine learning, insurtech, algorithms, automation, Robo-advisors etc. FinTech is paving the way for a new era of finance, with words such as ‘block chain’ and ‘smart contracts’ stepping onto the field. So let’s keep up with the future of finance, together!

 

Here’s a website about Malaysia’s FinTech companies for you to get started:

http://FinTechnews.sg/13378/malaysia/12-FinTech-startups-in-malaysia-watchlist/

 

References

References

  1. Badev, A. and Chen, M. (2014). Bitcoin: Technical Background and Data Analysis. [online] Board of Governors of the Federal Reserve System. Available at: http://www.federalreserve.gov/econresdata/feds/2014/files/2014104pap.pdf. [Accessed 19 May 2018].
  2. Bunjaku,F.,Gjorgieva-Trajkovska,O., and Miteva-Kacarski, E. (2017). Cryptocurrencies – Advantages and Disadvantages. Journal of Economics, 2(1), pp.37-38.
  3. Reiff, N. (2018). G-20 Classifies Bitcoin as an Asset. [online] Investopedia. Available at: https://www.investopedia.com/news/g20-classifies-Bitcoin-asset/ [Accessed 15 Jun. 2018].
  4. Wirdum, A. (2015). Is Bitcoin Anonymous? A Complete Beginner’s Guide. [online] Bitcoin Magazine. Available at: https://Bitcoinmagazine.com/articles/is-Bitcoin-anonymous-a-complete-beginner-s-guide-1447875283/ [Accessed 27 May 2018].
  5. Zmaznev, E. (2017). Bitcoin and Ethereum Revolution. [online] Centria University of Applied Sciences. Available at: https://www.theseus.fi/bitstream/handle/10024/141520/Thesis.pdf?sequence=1&isAllowed=y [Accessed 19 May 2018].

 

Prepared by:

Researchers – Do Wey Qing, Gan Kien Keng, Tang Wei Jet

Editors – Mohamad Syafiq, Nur Iman Tan