Money Journey: A transient stop at Block Chain 2.0.

Abstract FROM barter to paper, and now to electronic, the nature of money continues to change in response to specific problems of financial settlements encountered at different stages of its evolution.

In its early days and forms, there were not major concerns around trust and defaults. In fact, trust was the least of concerns as most transactions were settled on a person-to-person basis, with barter goods in hand to forestall defaults.

There was not the possibility of consummating transactions with counterparties outside reachable geographical radii. Although commerce was minute (both in volume and value), it was further subdued, mainly, by five drawbacks: the lack of the double coincidence of want, common measure of value, standard of deferred payment, indivisibility of goods and the difficulty in storing wealth.

Today, while all of these problems have been completely mitigated, the invention of money, first as goldsmith receipts, introduced new challenges capable of subverting its entire benefits and the financial system itself, were they ignored. Trust, default and double-spending issues quickly proved dangerous.

These problems, associated, were collectively and admirably addressed at a fell swoop by the introduction of trusted and accredited third-party agents – the banks.

Aside the issuance of currency – a function solely ceded to central banks, they prop up economic and financial trust by ensuring irrevocable finality of settlements, guaranteeing defaults, underwriting debts and preventing double spending; among others.

With the advent of electronic forms of money, starting from mobile banking to mobile money, this intermediating structure needing trusted third-parties has not been defied; and banks remain at the center of it all.

In 2008, Satoshi Nakamoto released a white paper on a purely peer-to-peer electronic cash system, whereby the central role of banks would be unanimously consented for decentralization.

In this arrangement, everyone would be onto himself, a trusted agent capable of all the functions of traditional banks. The block chain, as a revolutionary technology underlying bitcoin, is purported to eliminate trusted third-parties and the reasons they were created in the first instance.

This would imply critical adjustments to markets structures and infrastructures. Money will change its form again; and so will the channels that peddle it. The revolution steered by the block chain technology seems set to rattle everything.

But with its first application being money, how does the bitcoin compares to nascent and traditional financial systems, particularly, the mobile money scheme? And in spite of the polemic identity crisis of its inventor, the future of block chain continues to get clearer with first-time promise that finally puts chaos in check. So what is Bitcoin?

It was in 2009, during a chat over Skype with a techie friend, that he mentioned a revolution that was about to redefine money and its regulation.

With a national focus, championed by the Central Bank of Nigeria (CBN), on the introduction of the mobile money scheme, I doubted his optimism – hugely.

And as he whined about his fascination by the disruptive possibilities of a cryptographic currency, I remained entrenched in my mobile money doctrines with some mundane assumptions that: Bitcoin, as freshly announced, was simply another form of electronic payment like PayPal; Banks will remain pivotal to financial settlements between counterparties; This cryptographic currency will simply be secured by traditional but high-end cyber security measures such as the Secure Socket Layer (SSL), the Rivest-Shamir-Adleman (RSA) public-key cryptosystems and the likes ; With the mobile money, the supposed “disruptive” technology would, soon, be thrashed; especially seeing third-world nations caught in the mobile money frenzy; Considering the vision of its creator, I was utterly wrong! It turns out to be that bitcoin is everything in opposite to my assumptions.

Bitcoin: A new form of money Bitcoin is not a form of electronic payment. It is, in fact, money in a new form – virtual, cryptic and digital. It is created, held, secured and spent electronically in a virtual community of real participants. Unlike other fiat currencies (such as our Naira), which are issued by any central authorities and are backed by assets, bitcoins, a kind of cryptocurrency, are created by consensus interaction of people, businesses and computer systems all over the world via the internet; and based on a technology called “Block chain”, which is succinctly described as a mechanism for “decentralized consensus”.

They are not regulated. Neither are they securitized. Bitcoin is something we can call “stripped or naked Money”. By decentralized consensus, it means no individual, group of individuals or institutions would be vested with the powers to issue and regulate money. Instead, the collaborative participation of all individuals (called nodes) on the network (“block chain”) provides the regulation, protection and comfort needed for the sustenance of this burgeoning financial and payment system.

According to the white paper, titled “Bitcoin: A peer-to-peer Electronic Cash System” published by Satoshi Nakamoto, bitcoin, as an electronic coin, is simply “a chain of digital signatures”.

This could be likened to a one-thousand-naira bill that is chronologically signed; first, by the CBN as the issuer and thereafter, by every single individual or group of individuals that ever owned it through transactional settlements.

In addition to these inked signatures, they state on the same bill, the purpose, counterparties, date, time, and place of every settlement it ever went through.

This is to ensure that the next receiver of the bill is assured of the authenticity of the bill and is also able to verify the chain of transactions. Conceptually, this mechanism prevents theft. The last spender of any piece of currency must notify the last receiver of it.

This chaos of accompanying every unit of currency with a comprehensive ledger of transactions that created it and its ownership, is what bitcoin and the “block chain” technology try to solve.

In another fell swoop, it challenges the position of the banks as third-parties in financial settlements. No rooms for traditional Intermediation.

Satoshi argued that in order to shore up trust in banking industries across the globe, merchants hassle their customers for more information than they would otherwise need.

This lack of inherent trust and the proffered solution of excessive data gathering about individual customer, inadvertently, create another problem of “privacy breaches”.

While there are extant policies controlling the usage of customers’ details by banks, there are no fool-proof mechanisms to ensure that such vital information is not violated by privileged but iconoclastic bank officers.

This cuts the case for some recorded incidents of kidnapping of some surreptitiously wealthy individuals and the subsequent ransoms. He continued by stating that under the trust-based model, which banks effectively control, “a certain percentage of fraud is acceptable as unavoidable”.

Other problems raised in the paper that the bitcoin intends to address include: The inability to execute completely non-reversible transactions; The rising cost of transactions due to banks’ mediation; and The inability to transfer the smallest amount of money due to third-party charges.

To address these problems, an electronic payment system, based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third-party, was created – the Block Chain.

The cryptographic evidence attached to every transaction on the block chain ensures that, while the privacy of participants in any transaction is concealed in utmost secrecy, the integrity of transactions amongst them is never in doubt. In this final lap, the mediating role of banks is being challenged.

Block Chain – The Value Chain of Everything: This is where it gets thicker! The “block chain” is a protocol for seamless and instantaneous exchange of value through decentralized consensus.

This means that any two willing participants on the network are empowered to transact between themselves without the overbearing need for a trusted third-party.

This arrangement effectively reduces transaction costs to its barest minimum and ensures irreversible finality of transactions. Cost of transactions will reduce because mediating third-parties are completely eliminated.

Inherent components such as the costs of electricity, internet and maybe, time and effort would, however, remain. And except where the receiver of a payment initiates another transaction of equal value in opposite direction, the elimination of brokers implies non-reversibility of transactions.

These are some of the advantages of the block chain technology. So, how does it work? Block Chain Transactions: Consider a situation whereby every transaction in an economy, irrespective of market location, is recorded in a public ledger that is shared with everyone for concurrency; with the only set of rules being the ordering of transactions by timestamps and consensus verification by everyone.

“Ayodeji Odusote is a Solution Analyst with the Central Bank of Nigeria. He is a blogger and a social commentator, focused majorly on Technology and its Economic Impact; using Nigeria as a Case Study. He can be reached via email: aareago@gmail.com.