Jason Leibowitz is a former Wall Street professional who pivoted careers in 2014 to focus full-time on digital currency.
In this paper, Leibowitz answers questions about how bitcoin was created, how it works and why it matters.
It has been described as a "techno tour de force" by Microsoft founder Bill Gates, and as a "remarkable cryptographic achievement…that has enormous value" by Google CEO, Eric Schmidt. It was even predicted byNobel Prize-winning economist Milton Friedman in 1999 when he said, "The one thing that’s missing, but will soon be developed, is a reliable e-cash."
Friedman was a visionary, and in this instance he was a decade ahead of the rest, foreseeing the advent of digital currency, and more specifically, bitcoin.
Bitcoin’s rise to prominence is causing a global rethink of the concept of money. For thousands of years, gold was the currency of the land, and many of gold's qualities have allowed it to stand the test of time. As civilization developed and industrialized, ruling bodies learned that printing a government’s own currency, called fiat, was a more convenient and easier method of distributing wealth in society.
However, government-backed money has not stood the test of time; the average life of fiat currency is only 27 years. History is littered with examples of the failure of money, such as the Mark in post-WWI Weimar Germany and the Greek drachma in 1944.
Fast forward to the 21st century, where there are more mobile phones than there are people on earth, and perhaps it makes sense for a more global form of money to exist. Bitcoin is exactly that: a universal, internet currency that can work on any computer or mobile phone.
It is the result of decades of work in computer technology by nearly anonymous researchers, as it elegantly solves a longstanding problem in computer science. Bitcoin allows for trust between two unrelated parties over an untrustworthy network like the Internet.
With just a mobile phone any two parties can now transact without a central authority, company or bank mediating the transaction and in such a way that is safe and secure, publicly known, and uncontestable.
The origin of bitcoin
Similar to the way e-mail is a messaging rail that exists freely on the Internet for anyone to use globally 24x7, bitcoin is a payments rail that also exists freely on the Internet for anyone to use globally 24x7. Bitcoin (a crypto-currency, abbreviated BTC) was released in January of 2009 as a first-of-its-kind free payments system.
It does not require a credit card, bank account or the divulging of any personal identification to use or acquire. The catch is that you’re not using any government-backed fiat currency in this system. It uses a new currency altogether: bitcoin.
Before bitcoin was released there was a white paper entitled “Bitcoin, a Peer-to-Peer Electronic Cash System”, that was published in November 2008 by Satoshi Nakamoto.
Satoshi is an alias, and this creator of bitcoin has chosen to remain anonymous even to this day. Thinking about the global economic environment in November of 2008 when the white paper was published, it was the early stages of what is now known as the Great Recession.
Banks that were deemed "too big to fail" were on the verge of collapse, global stock markets were crashing, and wealth was being lost at a rapid pace.
Bitcoin dealt with the combination of distrust and uncertainty in the financial landscape of the time, offering a solution to the question, "Where can someone store value if the financial system fails?" The answer: the Internet.
The ubiquity of the internet in the 21st century is critical to the rise of Bitcoin. Of the approximately 5 billion adults in the world, over 85% have mobile phones. Even the most basic of mobile phones gives you access to a global network of communication, and bitcoin is transmittable on any network via multiple channels, including SMS text.
Mobile phones are becoming an increasingly important aspect of the global economy, and one interesting and relevant use case pertains to a program known as M-Pesa in Africa.
M-Pesa is a mobile-based virtual currency created by Safaricom, the largest mobile network operator in Kenya. It allows users to deposit, withdraw, transfer money and pay for goods and services easily with any mobile device.
M-Pesa stands for “mobile-money”, and was first launched approximately two years prior to bitcoin, in 2007.
Anyone with a mobile phone on this network can financially transact without the use of cash, credit cards or a bank account by simply using the SMS feature to securely send and receive monetary balances. M-Pesa is setup as a branchless banking service.
To obtain the currency one simply visits any distributor and physically exchanges cash for a text message containing a converted M-Pesa balance. Businesses of all types double as M-Pesa agents, in a similar way to corner stores with ATMs, and there are approximately 40,000 agents in Kenya.
M-Pesa has been praised for granting millions of people access to the formal financial system and for reducing crime in an otherwise largely cash-based society.
As of May 2015, over 40% of Kenya’s annual GDP was transacted through M-Pesa, and the success of the service has caused it to spread across three continents. However, the catch with M-Pesa is that you can only transact with someone on the same or a partnering cellular network. Bitcoin is similar in many ways to M-Pesa, only it is distributed globally for anyone to use on any network.
Bitcoin’s global accessibility is one of its most important features.
Each year, more than $500bn is sent across international borders in the form of remittances. This is the result of millions of immigrants across the world finding work in foreign countries in order to send money back home to their families and friends. Many of them are unbanked, making the process of remitting money across borders costly and inefficient.
However, digital currency technologies like bitcoin are disrupting traditional remittances businesses.
The most well-known money transfer companies are Western Union (WU) founded in 1851, and MoneyGram International (MGI) founded in 1940.
According to the World Bank, the average cost per user for sending remittances from G8 countries is around 10%. The high cost of remittances is due in part to the fact that there are over 10,000 employees working for traditional money-transfer corporations, with thousands of brick-and-mortar locations.
The high cost of operating these businesses is passed on to the customer through steep fees.
But in the 21st century, when transferring money is really just the instant click of a button and the update of a computerized ledger, it begs the question of whether such old-fashioned infrastructure is really necessary. Bitcoin enables users to remit money in minutes, for a fraction of the cost, using only a cell phone. Further, Bitcoin provides the rails to go from one currency to another using the Internet as a middleman (which is free) instead of companies like Western Union (not free).
For the banked population, sending money has become a relatively simple tas
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