What is Cryptocurrency?
Bitcoin is a unit of cryptocurrency or “computer-generated money” that uses an encoding or encryption technique to verify the exchange of funds between two parties independent of a central bank or sovereign nation. (TechCrunch, May 22, 2016) A cryptocurrency transaction is a snippet of limited programmable code written in a scripting language, a “smart” financial contract written in a computer code unique to Bitcoin or some other cryptocurrency denomination.
Cryptocurrency scripting languages are as unique as a real sovereign currency like US dollars, the Chinese yuan, or the Japanese yen. They are a form of “programmable money” restricted by a proprietary coding language with both significant characteristics. One standard characteristic is the blockchain. One distinguishing feature among these virtual currencies are decentralized computer networks. Ethereum is also “a cryptocurrency, like Bitcoin, and a vast, decentralized computer” system connected across the Net. The Ethereum technology is currently receiving growing attention.
What are blockchains?
TechCrunch explains that “Bitcoin’s contractual language … allows for transactions that can be delayed until a particular time; or transactions that occur only if, say, 3 of 5 signatories agree to them; or crowdfunding campaigns that only transfer money if a particular total is attained; and many other possibilities. Importantly, once incorporated into the Bitcoin blockchain, these contracts require no trust and no human intervention.” Blockchains are a distributed database of individual, time-stamped contracts describing a transfer of “virtual money” between two parties. The blockchain resembles a public ledger book replicated all over the Net. Since many machines have a replica of this digital ledger, the network is considered decentralized. There is no single central authority storing a “master blockchain.”
The article explains that “cryptocurrencies like Bitcoin and Ethereum are, or at least could be, the Internet (sic) for money, securities, and other contractual transactions. Like the Internet, they are permissionless networks that anyone can join and use. Ethereum optimists might analogize Bitcoin as the FTP of this transactional Internet, with Ethereum as its World Wide Web.”
Science fiction? Maybe. But so were smartphones thirty years ago. Digital technology has spawned yet another potential economic disruptor. Major financial players and legitimate businesses are showing interest in blockchain technology and programmable money. Investors are backing decentralized autonomous organizations (DAOs) with significant funds. The US Postal Service, crowdfunding projects, and major business concerns are also studying the usefulness of cryptocurrency and the blockchain technology. (CoinDesk, 2016)
The DAO is a paradigm shift in the very idea of economic organization.
What is the DOA?
Seth Bannon (TechCrunch, May 16, 2016) describes an emerging paradigm in “digital democratization of business.” Crowdfunding has now morphed into “crowd-founding.” An economic entity, modeled after traditional corporations, is called a Decentralized Autonomous Organization. Distributed computer code and “smart contracts” that define shareholder “authority.” Unlike traditional corporations, the sharing of authority and control can potentially be made accessible to all “owners” through decentralized, transparent records. As technology improves, smarter programmable money will help the exchange of goods and services. Bitcoin and Ethereum can serve well as, at least, proof-of-concept.
The Risk and Uncertainty
Many folks, including TechCrunch, emphasize risks and uncertainty in implementing different cryptocurrency technologies like Bitcoin and Ethereum. Legal and regulatory battles are certainly brewing around the use of cryptocurrency. Unfortunately, many sovereign government agencies and tax authorities still struggle with legacy technology and thinking rooted in the last century. Despite good reasons why the Department of Defense still uses “ancient” IBM Series/1 computers, reports often surface that “the Obama administration is partially run on floppy disks.” (Brian Fung, Washington Post, May 26, 2016; Maya Kosoff, Business Insider, January 5, 2015) We can live with the fact that information published on the Internet is “not” always correct, but eCommerce is an entirely different matter.
Time and technology will, no doubt, forge a path discernable to those who paying attention to the forest rather than the trees. The exponential increase in mobile devices is disrupting the way commerce works both on the Net and in brick and mortar establishments. Similarly growing numbers of financial transactions will likely seek a native, distributed technology that is atomic, decentralized, and transparent. Peter Horadan of Avalara, a sales tax automation company, has recently provided an in-depth review of blockchain technology (Peter Horadan, Accounting Today, May 31, 2016). We already pay for coffee with the wave of our iPhone. Future versions of blockchain-based technologies, like Bitcoin 3.x and Ethereum 3.x, will more than likely drive this revolutionary trend to greater reliability and eventual acceptance. Pay attention.
SOHO Tax Tips Takeaways
All the cool kids are doing Ethereum now, TechCrunch, May 22, 2016
Blockchain’s Big Innovation is Trust, Not Money, CoinDesk, May 21, 2016
Ethereum, explained: why Bitcoin’s stranger cousin is now worth $1 billion, Vox.com, May 24, 2016
The DAO is a New Dow – CoinDesk via The DAO is a New Dow, CoinDesk, May 22, 2016
Ethereum is the Forefront of Digital Currency Stories From Coinbase, Medium, May 24, 2016
Coinbase Co-Founder: Ethereum Could Blow Past Bitcoin, CoinDesk, May 24, 2016
Report: US Postal Service Could Create its Own Digital Currency, CoinDesk, May 23, 2016
Blockchain Startup Develops Identity App with Major Airline IT Firm, CoinDesk, May 25, 2016
The US Government Is Still Using Floppy Disks, Business Insider, Jan 5, 2015
The Real Reason America Controls Its Nukes With Ancient Floppy Disks, The Washington Post, May 26, 2016
How Blockain Will Change Business Transactions, Accounting Today, March 31, 2016