Bitcoin What it is | How it works

Is Bitcoin The Future of Currency?

Disclaimer: Bitcoin is not a recognised currency or monetary instrument in any jurisdiction

Presented by Michael Parsons FCA | 13 May 2013

1

What is Bitcoin?

Bitcoin is a decentralised electronic cash system using p2p

networking, digital signatures and cryptographic proof to enable irreversible payments between parties without relying on trust. Owned by no-one. No charge-backs.

Bitcoin is driven by a reaction to 3 separate developments Centralised monetary authority Diminishing financial privacy Dominant legacy infrastructure

Launched in January 2009 by Satoshi Nakamoto (unknown)

Open source (built on cryptographic primitives) computer protocol

that runs over the internet Elliptic Curve DSA and keypairs Double-spending prevented by a distributed time server

implementing chained RPOWs SHA-256 Hash (incorporating distributed block chain)

2

Digitised Money - Banks Digital Money - Bitcoins 1 Just digits/numbers Cryptographic protocol 2 Central Authority/Bank P2P network issues bitcoins 3 Banks hold electronic $/ Consumers hold BTC in own wallets 4 Numbers cannot be stolen Bitcoins can be removed/stolen 5 Paper money used as cash Bitcoins are (electronic) cash! 6 Physical Paper Money No Physical Bitcoins 7 Counterfeit Notes & Coins Bitcoins cannot be counterfeited 8 Quantitative Easing-inflate Bitcoin -fixed supply-Deflationary 9 All transactions recorded Anonymous recording in Blockchain 10 Note printing-inflationary No note printing-deflationary 11 Government controls

currency & Legal tender No-one controls Bitcoins. Total BTC issued capped at 21m over time.

12 Private data compromised? No private data given to merchants 13 Transaction fees/Forex None, or 0.0005c miners fee

3

Differences between Digitised and Digital Money

4

Bitcoin Exchanges Distribution by market & currency

5

Bitcoin Mining Rigs (De-Central Banks)

An example of a working Bitcoin mining rig A liquid-cooled box of 4 Radeon HD5870 cards. This mining rig computes about 1.3Gigahashes per second.

6

An estimation of hashrate distribution amongst the largest bitcoin mining pools

7

Bitcoin statistics

BTC economy (Market Cap) US$1,250m

Exchange rate US$120

Total Bitcoins mined 11,133,000

Total Bitcoins over time 21,000,000

Total Block count 235,465

Divisibility to 8 decimals 0.00000001

*Source: bitcoinwatch.com

8

Total issued over time 9

Security Issues

For Bitcoin users: Wallet.dat attack (on own PC) Online wallets Backups (USB stick, offline computer)

For Bitcoin companies:

Recent hacks at exchanges (BitFloor, Bitcoinica) Deterministic wallets (recovered from seed eg. carbonwallet.com)

Multi-signature capability- also yubikey Offline backups Cold and Partitioned Wallets No One needs to know basis joint access Policies & Procedures + robust technology

10

Bitcoin Applications

Wallets - Consumers Local client wallets (mobile: eg. Blockchain, Coinbase) Lightweight wallets (no blockchain multibit.org, electrum-

desktop.com ) Web-based online wallets (full blockchain -bitcoin.org) Bitcoincard (smart card - solar powered in 2013)

Merchant Processing

BitPay (-like PayPal for Bitcoins) BitInstant (-buy bitcoins instantly) Bitmit (-like eBay for bitcoins) Bitcoin 24/7 (-receive and store bitcoins) Paysius (-accept bitcoin, receive US$ in your bank a/c)

Mining Pools Bitcoin creation

Deepbit BTC Guild Slush

11

Regulatory Issues

No direct legislation (similar to browsers)

Variance in jurisdictional approaches

ECB report on Virtual Currency Schemes- October 2012

Decentralised nature inhibits third party shutdown

Exchanges will be a focal point of future government

scrutiny (as bitcoin cannot be regulated as money) therefore allow a (single?) regulated Bitcoin exchange?

Pressure on larger merchants who transact in bitcoins and perhaps BitPay payment processor

12

13

Future and Use Cases

Bitcoin has the required currency attributes Two-way convertibility Independent floating exchange rate Divisible and transferable (Non-political unit of account)

Opportunities for Government Gain first mover advantage 1st regulated Bitcoin

Exchange Bitcoin runs alongside existing currency UK could be the Bitcoin eco-hub of the World Enhance City of Londons status as Financial centre Taxation revenues would be significant

14

ah

15

Dawn of the Crypto Currency Economy...

Bitcoin is, like Skype to telephony, and email to post, virtually free and disruptive to the existing bank and card (electronic) payment systems But it is perhaps just another currency? Which Government will embrace Bitcoin first?

Bitcoin Eco-system would benefit from a UK regulated exchange anchor to provide world-class security and to develop mainstream usability and acceptance. And, better to have Bitcoin exchange transfers on the inside rather than (unregulated) outside.

Bitcoin predicted to be mainstream in 3-7 years and matured in 10 years

16

BitcoinWhat is Bitcoin?Slide Number 3Slide Number 4Slide Number 5Bitcoin Mining Rigs (De-Central Banks)Slide Number 7Bitcoin statisticsTotal issued over timeSecurity IssuesBitcoin ApplicationsRegulatory IssuesSlide Number 13Future and Use CasesSlide Number 15Dawn of the Crypto Currency Economy...