Truth about Mobile Payments, BitCoins, BlockChain and Cryptocurrencies - future of digital payments and future of banking FinTech. Why Telcos AND Retail Banks face major challenges - FinTech Keynote Speaker

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I often give keynotes at banking conferences on mobile banking FinTech and digital payments - and BitCoins are often discussed.

For over two decades, many people have been trying to develop a digital alternative to physical bank notes – to pay for things online in a fast, easy, secure and totally anonymous, private way. Are BitCoins the answer? 

Invented in 2008 by an anonymous group, BitCoins have quickly become established as a controversial global currency. 

Transactions take place from person to person directly, without any intermediary.  Each transaction is verified by a network node, and recorded permanently in a publicly distributed ledger.

It is hardly surprising that law agencies and central banks have been worried about BitCoins taking off globally.

In the dark web, which is where almost all BitCoins have been exchanged until recently – in web areas which most people don’t even know about – at least 70% of payments are for drugs, blackmail, arms dealing or other criminal behaviours.

In fact you can almost guarantee these days that blackmailers or extortioners will demand payment in BitCoins.

And when a large criminal BitCoin site is blocked, it affects BitCoin pricing for a while.  The same happened when the Wikileaks website was frozen – where again payments had been in BitCoins.

Digital challenges for money makers

The digital world is so totally different from the physical:

- An individual bank note is printed with a unique number, and is very hard to forge.  It can only exist in one place at one time.

- Anything in the digital world can in theory be duplicated at the speed of light, an infinite number of times.  Forgery could be as easy as copying a photo.

And that is the heart of the problem for BitCoins or any other similar digital currency.

The first step was to use some clever maths and code to create a unique and complicated set of encrypted numbers.  In the BitCoin system, each of these is registered on a global network of computers using a secret key known only to each BitCoin owner. This is the basis for each BitCoin, of which 15 million exist today – out of a maximum of 23 million that can ever be created.  That means there will be an absolute shortage of BitCoins IF the currency ends up being adopted globally to any significant degree.

“BitCoin mining” is time consuming and expensive.  It takes many years for a single computer to discover just one – and the electricity bill for doing so is well over $200.  And every 4 years the algorithm changes so that the value is halved in the mining process – most recently in June 2016.  3,600 BitCoins a day are being created at the moment, at an electricity cost of around $500,000.

Around the world, the electricity being burned up at any time to “mine” new bitcoins is enough to power over 150,000 European homes.  Because BitCoins are rare, and used in trading, they have a real value in dollars.

The second step was to set up a global register, showing where each BitCoin ownership is, and each transaction where a BitCoin is traded.  The register is anonymous, so no one actually knows who the real owners of BitCoins are.  The founders probably own around 7% of all BitCoins globally – so many that if they were all sold in a short period, the BitCoin value would collapse.

So how secure is the system?

Very secure say most experts.  Very secure say the criminals.

Too secure say the FBI and CIA – because of the difficulty in tracing money flows.

The trouble is that in all of the history of computing, every time someone claims something is totally secure, they have been later proven wrong.

I have no doubt that someone, somewhere will work out how to find (“mine”) new BitCoins in a fraction of the time it takes today, and at much lower cost.  And that would meant the value of each BitCoin could fall until they have all been issued – a limit has been set in the system beyond which no more BitCoins can be added.

I am also certain that someone will find a way to break the global register, allowing the same BitCoin to be sold more than once in a duplicate transaction.

Of course, these things don’t really matter to a blackmailer or someone selling drugs – who will probably cash in their BitCoins back into “real money” very rapidly. But they do matter if we start building an entire global financial system based on them.

BitCoin attacks – a growing list

1)  Huge numbers of BitCoins have repeatedly been stolen from owners or exchanges:

- over $65m lost in a single hack on a Hong Kong BitCoin exchange called BitFinex in July 2016

- DAO lost $80m in June 2016

- MT Gox saw hundreds of millions of BitCoins stolen in 2014 in another attack

- $5.1m was lost from BitStamp exchange in 2015

- BitCoinica was hacked in 2012

These are large amounts, bearing in mind that the currency is new, used by few people, with few trading platforms.  It is easy to imagine the equivalent of $500m or even $1bn being lost in a single similar attack in future, as BitCoins become more widely used.

On 15th December 2014, Hacker JoHoe announced that he had broken into a large number of privately owned BitCoin wallets, by using a special programme to analyse the BlockChain register of all BitCoin transactions, to break encryption keys – which he found easy to do.

A vital issue is securing private keys: once a hacker gets the keys to BitCoins, they get control, and can seize money very fast.  Private keys are like passwords, which prove who owns an asset or piece of information.  An investor recently lost $7m because he threw away a hard drive containing his secret ownership keys.

While transactions in the ledger can in theory be wound backwards in time so effectively cancelled, this violates one of the greatest strengths of BlockChain which is that a global register, present on many millions of independent computers, is a complete and unchangeable record of every transaction.

2) BitCoin computer networks searching for BitCoins have also been hijacked, so the criminals get hold of any new BitCoins as they are discovered, without paying anything for the processing time or electricity used. Similarly, hackers have taken control of millions of computers, hijacking their spare computing power to mine new BitCoins for free.

3) BitCoin registers could in theory be tricked by sophisticated software, allowing the same BitCoins to be traded more than once at the same moment.

4) The entire BitCoin register globally could in theory be corrupted or compromised if the attack was smart enough, enabling a criminal gang to sweep up a huge amount of BitCoins in the chaos.  Anyone who says this is impossible is a fool.

5) Fast and cheap ways could be discovered to secretly make a large number of BitCoins at very low cost compared to today.  Again, this is inevitable, but will be limited by the system since most BitCoins have already been made.

6) The contract mechanisms used to set up deals or trades can be attacked.

Despite these risks, many banks are exploring whether they can use a BitCoin-type register (called a BlockChain) as a unique code to attach to banking documents, payment records, customer files and so on.  They want to be able to prove ownership, prove delivery and so on.  But many of the same concerns apply. 

In summary, BitCoins are a powerful innovation, with huge potential for great good and great evil.  They are often used at present by criminals but the underlying BlockChain technology may end up being used mainly by banks.  Any information can be recorded in the BlockChain ledgers, but the longer the information, the greater the cost.

As with every other type of technology related to money, there will be a continuous race between criminal gangs looking to break the system, and the “good guys” looking to protect it.

But the greatest risk of all is complacency, believing the hype that the system is essentially unbreakable.  Nothing could be further from the truth.  We are likely to see some of the greatest financial crimes ever committed, carried out using or abusing BitCoins and BlockChains.  It can only be a matter of time.

Despite this, expect to see a huge number of FinTech companies in many nations, in a rush to bring BlockChain products to market for banks.

These may link to the BitCoin BlockChain register, or may be private BlockChain registers, or using alternative cryptocurrencies like BitCoin, of which a number already exist.

So in conclusion, BitCoin and BlockChain are very ingenious innovations which will be adapted and copied many times over the next two decades.  Most ordinary people in the world will be unaware of them, or how they work, but banks will find the technology very important in developing more secure ways to conduct transactions of any kind in future.

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