In this digital age where the internet is king, many have proclaimed binary currencies as the future of trade.
Recently, virtual currencies have garnered attention in Nigeria, thanks to the emergence of e-commerce and MMM’s announcement of plans to pay its members in Bitcoin.
They have been touted as the future of currency, business and everything else, but digital currencies have an interesting history that shows that there’s more to them than the very attractive surface.
1) A virtual currency or virtual money has been defined in 2012 by the European Central Bank as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community”
They are digital data-based assets that are designed as a measure of value to be exchanged for goods and services using complex layers of encryption to ensure that new units are not unduly created by individuals outside the community.
2) They may seem like a new, next-level innovation at the moment, but digital currencies are as old as the internet. The first of them to make a splash was E-Gold, which was created by an oncologist called Douglas Jackson in 1996.
The currency was backed by actual gold, and it became very successful, but it soon caught the attention of internet criminals and money launderers, who eventually led to its downfall.
3) Virtual currencies come in various types and forms. Over the years, there have been over 100 currencies, including Dogecoin, Peercoin and Perfect Money.
While some are serious attempts to create a universal medium of exchange, a number of digital currencies were created from memes or as pranks. The most successful digital currency in recent times is Bitcoin.
4) Before the advent of bitcoin, a similar digital currency once caught the attention of Nigerians. Liberty Reserve was created in 2006 and it quickly became popular among multi-level marketers and people who were hoping to score some quick cash from those schemes. Among other things, it also allowed users to send money to others and choose whether to disclose their identity.
With time, it became a favourite of money launderers for this reason, and in 2013, it was shut down by United States federal prosecutors with the support of authorities in 17 countries.
Founder, Arthur Budovsky was sentenced to a 20-year jail term in 2016 for conspiring to commit money laundering.
5) Bitcoin was created by a programmer or group of programmers under the pseudonym Satoshi Nakamoto, who mailed it first to a list of contemporaries in 2008 and released it as open-source software in 2009.
This person or group presently owns over one million bitcoins, with a value of over one billion dollars. Nobody knows who Nakomoto is.
6) Bitcoin is created through a process known as mining. The activity involves a competition where ‘miners’, usually developers, hackers or other computer-savvy folk use their expertise and complex equipment and systems to record bitcoin transactions into a database known as the blockchain.
Successful miners are paid in new bitcoins. In recent times, miners have organised themselves into pools; this enables them to make more entries, share equipment and make more bitcoins which they share among themselves.
7) Most financial transactions are made through banks or card payment platforms like Visa or Interswitch, but virtual currencies like Bitcoin cut out the middle man; so only two parties are involved.
This means that the cost of transactions is much lower than the usual; while banks charge between 2–5% on each transaction, the fee is much less with bitcoin, usually between 0–0.5%
8) To use bitcoin, users first have to get a Bitcoin Wallet. Since Bitcoins do not exist in a physical form, the wallet holds the digital information which connects the user to his holdings which are contained in the transaction ledger or blockchain.
A user may get desktop, mobile and web wallets as he deems fit. The wallet contains the passkeys which grant a user access to his bitcoins; losing the wallet means those bitcoins are lost forever, even though they will still exist in the blockchain.
9) One of the hallmarks of the bitcoin system is that it blends anonymity with transparency. Users do not need to disclose their personal data at any point, instead they manage their holdings and transactions with pseudonyms and usernames or numerical ids.
Unlike the mainstream financial system, all transactions made using bitcoin and their amounts are made public, and they can be seen by just about anyone who can access the blockchain. The problem is that while dealings can be followed, it is impossible to track down users when they use the system for criminal purposes such as money laundering.
10) The value of bitcoin is very unstable, and while it drives some to trade in it with a view to making some extra money, it is a very risky proposition for both short and long term investments. There are no regulatory bodies or policies to control its value so it is very prone to the influence of external factors.
On Thursday, 5 January 2017, after reaching a high of 1,153.02 dollars, the value of bitcoin fell by over 23% to 887.47 dollars to one bitcoin in a matter of hours.