Stanford scholars say Bitcoin offers promise, peril

Economists-Inquire.jpg-550x018 Feb 2014 / Stanford News – Bitcoin is a stateless, digital currency that allows people to make transactions with no middlemen – no banks, no transaction fees and no governments. Instead of printing banknotes or minting coins, a list of the registration numbers of each of the “bitcoins” and their owners is kept. In the last week, however, Bitcoin has found itself under siege for a variety of problems, and since then, the price of the coins has tumbled.

Susan Athey is an economics professor at the Stanford Graduate School of Business who researches Internet economics. Venture capitalist Balaji Srinivasan founded the Stanford Bitcoin Group. He has a Stanford doctoral degree in electrical engineering.

They spoke with Stanford News Service about Bitcoin:

Is the Bitcoin protocol trustworthy?

Athey: In terms of trustworthiness, a large community of experts has examined the protocol closely and found it to be secure. Possible weaknesses have been discussed extensively in the Bitcoin community as well as by academics. No protocol can be guaranteed to be perfect, of course.

In recent days, some issues have arisen with a denial-of-service attack that prevented transactions from confirming properly. MtGox, a major Bitcoin exchange, suspended withdrawals for a few days to deal with the issue. This is a reminder that all digital systems have some vulnerabilities.

Given the diminishing role of physical cash in our economy, we can expect problems to arise in all of the different financial systems we have.

My personal view is that it is important for regulators to provide a framework for legitimate Bitcoin businesses to operate within the U.S. legal system … legitimate firms will have the resources and incentive to provide more sophisticated consumer protection and to develop and adopt best practices for security.

Are we ready for Bitcoin on a large scale?

Srinivasan: If the Internet was programmable communication, Bitcoin is programmable money. The analogy is actually a very good one. Before the Internet, in order to deploy a program that used the central communications network, you needed a deal with a network operator like AT&T. With the Internet, individual nodes could write programs to directly communicate with each other, without any central approval required.

In the same way, today, in order to deploy a program that uses the central financial network, you need a deal with a large bank or credit card company. With Bitcoin, individual nodes can write programs to directly send and receive money from each other, without any central approval required.

There are technical improvements that will need to be made over the next few years to allow Bitcoin to become usable on a large scale. This is like the early Internet, which went from dial-up modems to broadband wireless over two decades…. Read more

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