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Bitcoin and
Blockchains
Background for Policymakers
Coin Center: Who are we?
We are a Washington, DC based non-profit
research and advocacy center.
Full time professional
sta...
Coin Center: Who are we?
Please visit us at
Coincenter.org for
full access to our
research.
Bitcoin: Network and Asset
Bitcoin is both a network protocol and a new
scarce asset that can be ‘owned.’
qua network
Bitc...
Bitcoin: Network
Like the Internet there is no single institution or company
that controls bitcoin. It is made up of sever...
Bitcoin: Network
Individuals or companies can join the network merely by
running free software on an Internet-connected ma...
Bitcoin: Network
There is are many versions of Bitcoin software, however a
group of developers, called “core devs,” build ...
Bitcoin: Network
Anyone can build their own software based on the
reference client, and as long as it follows certain
“con...
Bitcoin: Asset
A bitcoin is a chain of digital signatures stored in a public
ledger called the blockchain. One owns a bitc...
The ‘owner’ of the house is whoever is
listed on the final deed in a chain of
deeds held by a public registry.
That person...
The ‘owner’ of a bitcoin is whoever is referenced, by a pseudonym, in
the most recent digital signature in a chain of sign...
Public Address:
3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy
Public Key:
0488ff723a55ae8f46d9decf66c10a249adb59ac91195adee879ecb5944...
How the ledger, or blockchain is created and updated.
Special members of the network, called miners, compete to solve a
di...
The first one to solve the problem can write a new block in the
blockchain, recording all of the transfers that were reque...
How does the network agree?
When a miner announces to the network that she solved a block,
the other miners check to see i...
What happens next?
If the block looks good, miners will begin working on solving the next block (so that
they can get the ...
Why is this secure?
Recall that solving one block was difficult, like flipping a coin and it landing on heads 10 times in
...
One can interact with the bitcoin network with
local software, or through a business that
specializes in:
Bitcoin Business...
Only need:
Free software.
Internet connection.
Why is Bitcoin useful?
Any other form of electronic money transfer involves...
Why this useful: Remittances
“The current fee charged by the Bitcoin network can be as little
as zero, but also has a fixe...
Why this useful: ID Theft.
“By substantially reducing the number of parties that the
consumer must trust, Bitcoin can miti...
Why this useful: Smart Contracts
“By using a smart contract, parties commit themselves to be bound
by the rules and determ...
● Licensing
● AML / KYC
● Consumer Protection
● Securities Law
Regulatory Issues
● In countries and states where money
services businesses must be licensed. Do
bitcoin businesses need a license?
● What a...
● Is Bitcoin anonymous? Not really.
● How can Bitcoin businesses fulfill their
recordkeeping obligations when they may
dea...
● How do we stop another exchange from
disappearing with customer funds (Mt. Gox).
● How can technologies inherent to bitc...
● As a means to creating an authoritative
record of ownership, Bitcoin or other
blockchain technologies can build digital
...
Questions?
For more information visit coincenter.org
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Coin Center at EU Science and Technology Options Assessment Meeting Jan 25, 2015

Coin Center Director of Research, Peter Van Valkenburgh, discusses Bitcoin at the EU Parliament Science and Technology Options Assessment Meeting Jan 25, 2015

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Coin Center at EU Science and Technology Options Assessment Meeting Jan 25, 2015

  1. 1. Bitcoin and Blockchains Background for Policymakers
  2. 2. Coin Center: Who are we? We are a Washington, DC based non-profit research and advocacy center. Full time professional staff. Support from key industry players and venture capitalists.
  3. 3. Coin Center: Who are we? Please visit us at Coincenter.org for full access to our research.
  4. 4. Bitcoin: Network and Asset Bitcoin is both a network protocol and a new scarce asset that can be ‘owned.’ qua network Bitcoin qua asset bitcoin
  5. 5. Bitcoin: Network Like the Internet there is no single institution or company that controls bitcoin. It is made up of several thousand computers working together and speaking the same language or “protocol.”
  6. 6. Bitcoin: Network Individuals or companies can join the network merely by running free software on an Internet-connected machine.
  7. 7. Bitcoin: Network There is are many versions of Bitcoin software, however a group of developers, called “core devs,” build and maintain a “reference client.” Lead core dev, Gavin Andresen
  8. 8. Bitcoin: Network Anyone can build their own software based on the reference client, and as long as it follows certain “consensus rules” it will be compatible with the larger Bitcoin network.
  9. 9. Bitcoin: Asset A bitcoin is a chain of digital signatures stored in a public ledger called the blockchain. One owns a bitcoin rather like one owns a house.
  10. 10. The ‘owner’ of the house is whoever is listed on the final deed in a chain of deeds held by a public registry. That person can sign her deed over to someone else, transferring ownership.
  11. 11. The ‘owner’ of a bitcoin is whoever is referenced, by a pseudonym, in the most recent digital signature in a chain of signatures. These signatures are held in a public ledger, called the blockchain. That person is the only person who can sign her bitcoin over to someone else, transferring ownership. The network would reject any other signature because it would violate the software’s consensus rules.
  12. 12. Public Address: 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy Public Key: 0488ff723a55ae8f46d9decf66c10a249adb59ac91195adee879ecb5944ea7f5098dd9e193c2172047e6eacb6ddd 524c77ee5669b2f69bbfb27fc03d717d657195 Private Key: e6edcf30220499bd034a7f4ebbadd4d62c89995c01157067983b4f1f26b58111 A Bitcoin Pseudonym The address where you can receive bitcoins. The key that you must have in order to send bitcoins from your address. Keys are linked because of a cryptographic function called ECDSA. This function generates to verifiably matched keys. It’s the same mathematics used to secure communications on the Internet.
  13. 13. How the ledger, or blockchain is created and updated. Special members of the network, called miners, compete to solve a difficult but open ended math problem. Think of it like a bunch of schoolkids racing to see who can be the first to flip a coin heads-up ten times in a row.
  14. 14. The first one to solve the problem can write a new block in the blockchain, recording all of the transfers that were requested of the miner in the last ~10 minutes. As a reward, they can also write a transaction to themselves for 25 new bitcoins. A3R34AF sent 4 bitcoins to SF345L FS399G0 sent 2 bitcoins to 39VB09 CI6LE863 sent 3 bitcoins to MD39N3 Winner of this block sends 25 bitcoins to himself, VV1658D How the ledger, or blockchain is created and updated.
  15. 15. How does the network agree? When a miner announces to the network that she solved a block, the other miners check to see if it is “valid” according to the consensus rules of the software. A3R34AF sent 4 bitcoins to SF345L FS399G0 sent 2 bitcoins to 39VB09 CI6LE863 sent 3 bitcoins to MD39N3 Winner of this block sends 25 bitcoins to himself, VV1658D Did these addresses have enough Bitcoin to fund the transfer? Did the miner give herself the appropriate reward?
  16. 16. What happens next? If the block looks good, miners will begin working on solving the next block (so that they can get the next reward). The next block is built on top of the last one by incorporating it, as an input, into the next math problem to be solved. This is why the ledger is called the blockchain. G3R34AF sent 4 bitcoins to SF345L FS399G0 sent 2 bitcoins to 39VB09 CI6LE863 sent 3 bitcoins to MD39N3 Winner of this block sends 25 bitcoins to himself, VV1658D A3R34AF sent 4 bitcoins to SF345L FS399G0 sent 2 bitcoins to 39VB09 CI6LE863 sent 3 bitcoins to MD39N3 Winner of this block sends 25 bitcoins to himself, VV1658D 43R34AF sent 4 bitcoins to SF345L FS399G0 sent 2 bitcoins to 39VB09 CI6LE863 sent 3 bitcoins to MD39N3 Winner of this block sends 25 bitcoins to himself, VV1658D H3R34AF sent 4 bitcoins to SF345L FS399G0 sent 2 bitcoins to 39VB09 CI6LE863 sent 3 bitcoins to MD39N3 Winner of this block sends 25 bitcoins to himself, VV1658D
  17. 17. Why is this secure? Recall that solving one block was difficult, like flipping a coin and it landing on heads 10 times in a row. Therefore for a person to try and rewrite the transaction history going back 10 blocks they’d have flip a coin heads-up 100 times. The odds are so bad, that it’s effectively impossible. This means that a transaction recorded more than a few blocks back is indelible. G3R34AF sent 4 bitcoins to SF345L FS399G0 sent 2 bitcoins to 39VB09 CI6LE863 sent 3 bitcoins to MD39N3 Winner of this block sends 25 bitcoins to himself, VV1658D A3R34AF sent 4 bitcoins to SF345L FS399G0 sent 2 bitcoins to 39VB09 CI6LE863 sent 3 bitcoins to MD39N3 Winner of this block sends 25 bitcoins to himself, VV1658D 43R34AF sent 4 bitcoins to SF345L FS399G0 sent 2 bitcoins to 39VB09 CI6LE863 sent 3 bitcoins to MD39N3 Winner of this block sends 25 bitcoins to himself, VV1658D H3R34AF sent 4 bitcoins to SF345L FS399G0 sent 2 bitcoins to 39VB09 CI6LE863 sent 3 bitcoins to MD39N3 Winner of this block sends 25 bitcoins to himself, VV1658D
  18. 18. One can interact with the bitcoin network with local software, or through a business that specializes in: Bitcoin Businesses Storing and Securing Your Bitcoins. Converting fiat currency into bitcoins and vice versa. Helping Merchants accept Bitcoin as payment.
  19. 19. Only need: Free software. Internet connection. Why is Bitcoin useful? Any other form of electronic money transfer involves trusted intermediaries. For the transfer to work, both parties must have a relationship with the same intermediary, or multiple intermediaries must have relationships with each other. Any of those intermediaries may charge fees. Bitcoin works even for those who don’t have access to a banking relationship. Also, with no intermediaries fees are lower.
  20. 20. Why this useful: Remittances “The current fee charged by the Bitcoin network can be as little as zero, but also has a fixed maximum fee of 0.0001 bitcoin per transaction, or about 4 US cents. With smartphones in emerging markets selling for as little as $35 US, this means that even very poor citizens in developing nations can receive bitcoins directly from their relatives working abroad without paying the fees associated with traditional money transmitter businesses.” Attorney and Coin Center Contributor Brock Cusick
  21. 21. Why this useful: ID Theft. “By substantially reducing the number of parties that the consumer must trust, Bitcoin can mitigate the danger of identity theft and fraudulent charges.” Executive Architect for Innovation at IBM UK and Coin Center Contributor Richard Gendal Brown
  22. 22. Why this useful: Smart Contracts “By using a smart contract, parties commit themselves to be bound by the rules and determinations of the underlying code. Doing so in principle removes the potential for parties to have a dispute: both parties are held to whatever outcome the smart contract determines. In his seminal 1997 article, legal scholar and technologist Nick Szabo described what may happen to someone that breaches a smart car lease: ‘if the owner fails to make payments, the smart contract invokes the lien protocol, which [automatically] returns control of the car keys to the bank.’” Professor of law at NYLS and Coin Center Fellow Houman Shadab
  23. 23. ● Licensing ● AML / KYC ● Consumer Protection ● Securities Law Regulatory Issues
  24. 24. ● In countries and states where money services businesses must be licensed. Do bitcoin businesses need a license? ● What about non-financial uses of Bitcoin? Licensing
  25. 25. ● Is Bitcoin anonymous? Not really. ● How can Bitcoin businesses fulfill their recordkeeping obligations when they may deal primarily with pseudonyms? AML/KYC
  26. 26. ● How do we stop another exchange from disappearing with customer funds (Mt. Gox). ● How can technologies inherent to bitcoin, like multi-sig transactions, and cold storage help protect consumer funds? Consumer Protection
  27. 27. ● As a means to creating an authoritative record of ownership, Bitcoin or other blockchain technologies can build digital clearinghouses. ● If a company promises to redeem a bitcoin or other crypto-token for equity, do securities regulations apply? Securities Law
  28. 28. Questions? For more information visit coincenter.org

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