Pub. 10 2021-Issue 2

7 S u mm e r | 2021 F E A T U R E Brian Laverdure, AAP, is Vice President, Payments and Technology Policy for the Independent Community Bankers of America (ICBA). In this role, he advocates payments and bank technology policy issues before financial regulatory agencies, private-sector organizations, and Congress on behalf of the nation’s community banks. community in April 2011. Nakamoto, whose identity remains a mystery, has  estimated holdings  of 1.1 million bitcoin that have never been spent or transferred. How Does Bitcoin Work? Unlike the electronic payments that bank customers initiate with ACH or cards, Bitcoin transactions do not flow over traditional payment rails or require processing financial institutions to complete the transactions. New Bitcoin is not created by any central bank but generated through a process called mining. Bitcoin does not exist as a physical object. Images of golden coins stamped with various Bitcoin symbols are artistic representations to help viewers understand or visualize the abstract concept of cryptocurrency. Miners are engaged in a 24/7 race to bundle unprocessed transactions into blocks to add to the public ledger of all Bitcoin transactions, known as the blockchain, to receive transaction fees and newly minted Bitcoin as compensation for their efforts to maintain the network. The network relies on miners to process and validate all pending transactions and, most importantly, prevent users from spending the same bitcoin twice. Nakamoto devised a clever solution to achieve consensus across the decentralized network and ensure that transaction processing  requires enough resources  to disincentivize miners from confirming false records. Miners must complete challenging proof-of-work calculations that consume tremendous amounts of electricity to sustain sufficient computing power. The proof-of-work equations become increasingly complex over time, necessitating more powerful computers and more electricity. Bitcoin’s electricity use is  now controversial with many critics, including  Treasury Secretary Janet Yellen, calling it wasteful and harmful to the environment. To initiate a Bitcoin transaction, an owner needs access to a Bitcoin address and a private key. The Bitcoin address, a hashed version of the public key, is similar to a publicly shared bank account number. The private key is comparable to an exclusive password. These are critical elements of a process called  public-key encryption  that cryptographically secures all transactions. All the “electronic coins” associated with a particular address are a “chain of digital signatures” because the number of bitcoins contained within any address always derives from the outputs of previous transactions. A new transaction occurs when the owner digitally signs a transaction message with their private key, proves ownership of bitcoin associated with the address, and secures the directive before broadcasting into the network for confirmation. A private key should never be shared and should always be protected — losing a private key means losing access to bitcoin. Likewise, forfeiting one’s keys to someone else risks surrendering control of one’s bitcoin. There are many stories of lost fortunes due to  forgotten passwords,  lost hard drives , or hackers obtaining private keys to  steal cryptocurrency . Researchers estimate that  20%  of all created Bitcoin may be permanently lost. The Evolution of Bitcoin Expanded beyond its mysterious origins to become a complex force for innovation in financial services, Bitcoin will dramatically impact community bank operations. There were an estimated  101 million  unique crypto- asset users as of the third quarter of 2020, with fou r in 10  planning to use cryptocurrency within the upcoming year. Other announcements, such as  Coinbase’s initial public offering  and  PayPal’s expanded cryptocurrency services , signify that the digital currency industry is advancing toward a new level of adoption and acceptance. However, important questions remain unresolved, including whether Bitcoin possesses the attributes to qualify as money or is instead a speculative store of value. Resolving this question will directly affect the development of cryptocurrency policies and regulations. I will continue to examine this question more closely in the coming months, along with more on direct implications of cryptocurrency on community banks. Meanwhile, don’t forget to follow me on Twitter @brian_laverdure for more news and perspective on cryptocurrency. To initiate a Bitcoin transaction, an owner needs access to a Bitcoin address and a private key. The Bitcoin address, a hashed version of the public key, is similar to a publicly shared bank account number. The private key is comparable to an exclusive password.