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Bitcoins: a primer on the virtual currency of the future
SECURITY

Bitcoins: a primer on the virtual currency of the future 

The rise in their popularity brings up a number of questions: how secure are bitcoins? Are they the currency of the future? What limitations of their use, if any, exist? Joseph Onorati, compliance officer for Canada’s Virtual Exchange (CAVIRTEX), offered his perspective on the impact of bitcoins on both the world and Canada.

Part of the newsworthiness of bitcoins is that they are a relatively new development and there is still some confusion surrounding them. Bitcoins are a virtual currency. They only exist online and there is no central authority (such as the Bank of Canada) that controls them. New bitcoins are released onto the market through a procedure called mining. An encrypted computer program hides available bitcoins. Bitcoin users’ computers work to solve a complex math problem in order to obtain coins. This process requires vast amounts of computing power. So far, 11 million bitcoins have been mined, and there are 21 million that exist in total. The computer program that hides the bitcoins is designed to make users’ computers work harder and harder to mine the virtual currency. Thus, bitcoins’ growth rate will remain steady and predictable.

Users hold bitcoins in an online wallet, which is an account established on a third-party website. They can use them to purchase goods and services in an online marketplace, in which transactions are anonymous and untraceable. Onorati explained that online wallets are generally very secure. “Bitcoin exchanges and wallet services’ protective provisions and standards will vary from one company to another,” he said. “Generally speaking, however, most businesses that hold Bitcoin for their users will keep a large percentage of the coins in what’s called cold storage. That means the coins will be held in offline wallets that cannot be compromised by hackers. A much smaller percent of the coins would be held in hot wallets that allow for convenient withdrawal.”

Onorati noted that he has seen growing interest in bitcoins from various businesses. “Insurance companies are also starting to understand Bitcoin and how it can be secured, and the equivalent of deposit insurance is actually becoming available,” he remarked. “Several companies already insure their customers’ Bitcoin holdings, and I believe this will become an industry standard in just a few months.”

If the insurance industry is embracing the use of bitcoins, can government regulations be far behind? Onorati does not believe that will be the case. “Canadian regulation as it was written was less applicable to Bitcoin than it was in other countries, so in a sense the Canadian government has been more hands-off concerning Bitcoin than others,” he commented. “This has probably played some part in the growth of such a large and diverse ecosystem of Bitcoin start-ups across Canada.”

While the Canadian government has been relatively easygoing in its approach towards bitcoins, Onorati pointed out the same is not true of the country’s banking sector. “The Canadian banking industry has been probably a little less friendly to Bitcoin than the banking industry in other countries,” he observed. “Since most Bitcoin businesses, including CAVIRTEX, require bank accounts to operate, the requirements set by the banks have guided decision-making in the industry.” In spite of the wariness Canada’s banking sector exhibits towards bitcoins, businesses based on the virtual currency are doing everything they can to gain its acceptance. “Some Canadian Bitcoin businesses have worked to be compliant with money service regulation even though they have not been required to do so,” Onorati said.

Although the number of businesses related to bitcoins in Canada is growing, does the virtual currency have staying power? Onorati believes it does. “We think Bitcoin has the power to disrupt an enormous portion of the global financial industry – and multiple other industries,” he asserted. Simply because they are somewhat misunderstood does not mean they will not be widely embraced. “Others have compared Bitcoin to the Internet or email in the early to mid-nineties,” Onorati added. “Not many people understood TCP/IP, and there was likely a good amount of confusion around electronic mail, but that didn’t stop it from becoming one of the most dominant forms of communication.”

“Bitcoin, cryptocurrency, and blockchain technology generally are in their infancy today,” Onorati concluded. “Any confusion surrounding them now will seem insignificant compared to the growth that this industry will experience in the coming years as leading companies expand.”

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