Technology behind Bitcoin can be used for tasks handled by banks, e-commerce providers & middlemen

Invictus Innovations Inc., Ripple Labs Inc. and other startups are harnessing Bitcoin’s underlying code for such tasks as authentication, which means making sure that a buyer isn’t posing as someone else, and verification of payments to ensure that a transaction is valid. If successful, the new tools could reduce the fees shouldered by buyers and sellers in the $1.22 trillion global electronic-commerce market, as well in financial services, cloud computing and other areas.

“People are just starting to realize that Bitcoin isn’t a currency and a payment system, it’s the Internet of Money,” David Johnston, co-founder of BitAngels, a group of investors in Bitcoin-related startups, said in an interview. “It’s a really exciting time.” BitAngels is currently considering more than 30 projects in the Internet-of-Money category, Johnston said.

There’s growing recognition, even among financial firms, that Bitcoin’s underlying design can be used for any transaction requiring some degree of verification. In a report this month, Goldman Sachs Group Inc. said while Bitcoins probably won’t be viable as a currency, the basic technology “could hold promise.” Bitcoin’s future as the Internet of Money was one of the hottest topics at the CoinSummit conference in San Francisco this week.

Digital Money

Bitcoin captured the attention of investors and innovators last year, fueling a rally that drove the value of the digital money to about $1,200 from $12. More recently, scrutiny from governments, bans in China and India, and the collapse of online exchange Mt. Gox have cast doubt on the viability of Bitcoin as credible replacement for fiat currencies.

The price of Bitcoin plunged almost 10 percent on Thursday after China’s central bank ordered banks and payment companies to close the trading accounts of more than 10 Bitcoin exchanges. Bitcoin was valued at about $500, according to the CoinDesk Bitcoin Price Index.

The software behind Bitcoin relies on a public record of every transaction that’s ever made. When someone spends all or part of a Bitcoin, the change in ownership is recorded by a global network of computers and posted to a public register, ensuring that the same unit of money can’t be used twice. The owners of computers solving and verifying these transactions are rewarded with new Bitcoins for their work.

Building Blocks

Bitcoin’s building blocks, designed to validate each transaction, are adaptable for any type of exchange, regardless of whether they are attached to a currency or not. Called a blockchain, the currency’s underlying design opens up possibilities for the technology to be used in other industries, according to Marc Andreessen, a partner at Andreessen Horowitz who is looking to fund startups focused on this new category. “The blockchain is the core innovation,” Andreessen said at CoinSummit.

“We want a whole sequence of companies: digital title, digital media assets, digital stocks and bonds, digital crowdfunding, digital insurance. If you have online trust like the blockchain provides, you can reinvent field after field after field.”

Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.

Buyers, Sellers

BitShares X, a decentralized bank and exchange, is among the first Internet of Money services. Developed by Blacksburg, Virginia-based Invictus, BitShares X will debut in the second quarter and will offer users the ability to save, trade, borrow and lend financial securities, from dollars to derivatives, without an intermediary like a bank or brokerage. Transactions are handled by users’ computers, and verified publicly, making theft or fraud impossible.

“With a traditional exchange, you send your dollars, and they record an IOU for so many dollars,” Dan Larimer, chief executive officer of Invictus, said. “The exchange can default on their IOUs to you --Mt. Gox is an example. In our case, no one can steal the balance from your account.”

The technology can potentially eliminate fees, which pay for the cost of accounting systems, banking services and verification of account holders, according to Chris Dixon, a partner at Andreessen Horowitz. By eliminating most of those expenses, financial services such as escrows and dispute resolution based on the Internet of Money could represent a significant business opportunity, he said in an interview. “What Bitcoin does, it removes the need for trust in the system,” Dixon said. “It’s very brilliantly designed.”

Real Things

People buying and selling physical goods, especially expensive items such as cars and houses, can also benefit from Bitcoin’s technology. EBay Inc. and real estate brokers stand in the middle of transactions, ensuring each party’s identity and making sure everyone gets paid, for a fee. While this doesn’t rule out person-to-person deals, many opt to pay a commission to a middleman to minimize risk.

Ownership of goods could be tied to a verified digital token that can be transferred to the buyer from the seller, simultaneously with a payment.

“There’s a potential for at least 10 percent of the world’s e-commerce to be done over the blockchain,” Michael Terpin, co-founder of BitAngels, said in an interview.

Keybase, another nascent idea, works as a virtual identity card, verifying people using the same underlying Bitcoin technology. In addition to confirming people for messages or e- mail, it can also be used to as a certificate of authenticity for files or online video streams.

Open Markets

In another scenario, Bitcoin Tangible Trust lets people buy and trade gold using Bitcoin technology to validate transactions and show ownership. Ripple Gateway Pte’s RippleSingapore offers a similar service for trading gold, silver, platinum and currencies. Some 200 people are using the system, which is backed by bullion reserves, and currency deposits at Singapore’s Oversea-Chinese Banking Corp.

Digital media, such as music and video can also benefit from the same technology. Invictus is planning a service that lets users buy shares in sound tracks, for example. “It’s a way for fans to buy into a song when it’s new, and if it becomes popular, you can make money,” Larimer said. Since digital content ownership will be verified, such a service will be a natural defense against piracy, he said.

Voting Tools

Using Bitcoin technology and cars connected to wireless networks, package courier services could evolve into a self organizing industry. Anyone who is part of the service with a car could become a courier, picking up and delivering packages as they commute or run errands.

While still a conceptual idea, the system would collect fees from senders and pay deliverers.

MaidSafe has developed a service that lets consumers share storage or processing power with others, an alternative to cloud-computing providers such as Amazon Web Services. David Irvine, MaidSafe’s founder, said he’s working with about 20 companies that are creating Web applications.

The Internet of Money isn’t all about cash and software, said Dave Cohen, a 45-year-old programmer in San Francisco who is working on a way to let users cast votes using Bitcoin-based verification. “I would like to see voting for the voters to be convenient, and for the vote counting to be almost instantaneous,” Cohen said.

New Coins

JPMorgan Chase & Co. and EBay have filed patents that mention digital currencies such as Bitcoin and underlying technologies. “We know for a fact that many financial companies are thinking about adopting it,” Balaji Srinivasan, a partner at Andreessen Horowitz, said in an interview. “We see banks all the time that are evaluating this for internal operations.” While some of the Bitcoin 2.0 startups are using the existing Bitcoin network, many are creating alternate versions that work in the same way to provide verification.

The most well-known projects are Mastercoin, Ethereum, Colored Coins, Counterparty, Ripple and BitShares.

BitAngels’ Johnston said the majority of his group’s funding and deals will be related to Internet of Money this year. After evaluating 200 investments last year, the venture- capital group invested more than 60 percent of its funds in Mastercoin, he said.

“Right now, Bitcoin is in the lead,” Brock Pierce, an investor in Mastercoin, said. “And usually, the technology that gets the most adopters wins.”