Voice of the Industry

Emma Lindley, Director, Innovate Identity: Is Bitcoin safe?

Monday 27 January 2014 13:29 CET | Editor: Melisande Mual | Voice of the industry

For something to be deemed ‘safe’, there should be no risk associated at all with a particular product or service. This is almost impossible.

Let’s be clear: risk is associated with any financial product including cash, credit cards, pensions and Bitcoin (mining and exchanging). Ask anyone attempting to retire in a recession if they think a pension was a ‘safe’ place to stick hard earned cash. They will give you a different answer than predicted, I’m sure.

Financial services are based on trust

Trust is one of the crucial elements which determines the safety of any financial model. If there is no trust in a financial model, then it could, by implication, suggest it is not safe.

In the beginning, there was the barter economy: “I’ll trade you my pig for 50 apples”. To make these trades easier, we moved from barter to coins and then to notes as our currency. The principle was created around the trust people place in the value of notes and coins. Trusting them should be enough to purchase a pig or 50 apples. The principle still stands true with Bitcoin: a currency is only as good as the trust within it.

By its very technical nature, Bitcoin depends on trust. Exchanged through a distributed network of trust without the requirement for an intermediary, like a bank, Bitcoin works in a way that allows only the owner of an asset to send Bitcoins to the intended recipient (and only the intended recipient).

“Bitcoin is anonymous” is false

One statement we hear in relation to the safety of Bitcoin is that it is anonymous and therefore considered unsafe. Bitcoin is pseudonymous, not anonymous. The two are not the same and can have very different outcomes.

In our line of work, we are looking at ways of solving the ‘How to make identity pseudonymous’ puzzle. There are so many countless uses and cases for pseudonymous identity. Let’s use the adult content industry as an example. Experience has taught us that people don’t want to have to present their full identity details, such as a passport or driving licence, to prove their age so they can watch porn. It just isnt going to happen. Some level of pseudo-anonymity in this context would solve a raft of issues.

No disclosure ? no trust

The ‘Bitcoin is anonymous’ point also suggests that if something is not fully disclosed, then by default it cannot be trusted, nor is it safe. This assumption is also incorrect. Take the example of chargeback transactions. People still chargeback a transaction, even when their identity is fully disclosed.

Bitcoin has a bad reputation

Despite dubious beginnings, disruptive innovation has to come from somewhere and this also applies to Bitcoin mining and exchanges. The doubt surrounding Bitcoin has been fuelled by its sudden burst on to the global financial scene. Its bad reputation has also come from infamous examples pulled from the shady underworld of The Dark Net where people bury themselves within TOR (The Onion Router). Those seeking to be totally anonymous whilst merrily spending Bitcoins on the Silk Road are the cause of many arguments against Bitcoin.

Consumer protection with control

Despite all the positives, some control is going to be required and consumer protection needs to be in place. Almost no financial services and regulatory framework in any country saw Bitcoin coming. Taking this into account and assuming the model is embraced, it will be interesting to observe how the various global regulators will manage the risk. Can they effectively manage the risk but also maximise the opportunities Bitcoin presents? Increasing the trustworthiness of this financial model can only increase the overall value of Bitcoin.

Here to stay

Since prolific people within the technology development sphere are both accepting Bitcoin and investing in it, it is highly likely that it’s here to stay. Richard Branson now accepts Bitcoin to pay for his Virgin Galactic flights. Having likened the network effect of Bitcoin with the advent of the internet, Marc Andreessen has invested USD50m in Bitcoin related start-ups.

In order to stick around, Bitcoin needs to maintain and increase trust. This in itself may only be possible with the implementation of some control. Let us hope that any regulation is proportionate to the risk.

Emma Lindley has over 14 years’ experience working with technology led identity, compliance and fraud systems. She works with merchants, regulators and governments globally helping them build best practice for identity and risk. Emma has an MBA from Manchester Business School.

Innovate Identity is an independent consultancy providing advisory services focused on digital trust, data and technology innovation within the global online community. Our areas of expertise include Global Identity Proofing, “Midata”, Identity Verification, Age Verification, Know Your Customer, Anti Money Laundering, Data Privacy and Anti Fraud technologies. We improve our client’s global reach, competitive advantage, return on investment and enable sustainable business transformation through identity innovation.

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Keywords: Emma Lindley, Innovate Identity, Bitcoin, financial product, financial service, currency, coins, identity details, disruptive innovation, consumer protection
Countries: World

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