How bitcoin could be as revolutionary as the internet

The digital currency will be as big a gamechanger as the internet, says Ken Tindell.

Bitcoin is all over the news again. China has banned banks from transacting in the digital currency, just as Bank of America Merrill Lynch has argued that it has a fair value' of $1,300. But none of these stories grasp the really interesting part how the underlying bitcoin platform itself can be used to manage the ownership of real-world assets.

At heart, bitcoin is simply a huge public ledger, recording who gave what to whom and when: a long list of transactions (27 million at last count), replicated across a network of thousands of computers.

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To work out how much bitcoin money you have, you just look down the list of your transactions and add them up. To give someone bitcoin money, you send a transfer please' message to the network, which copies the request around the computers and checks all is in order.

It is put in a block of transactions, which are added to the ledger (the block chain'). You can read more on the inner workings of the currency and how it's mined at Moneyweek.com/Bitcoin. But I want to focus on its wider potential.

Coloured coins and ownership rights

There are even time locks that dictate how long a transaction is valid. This allows quite sophisticated systems to be built, such as escrow agents for payment dispute resolution, time-limited deposits, and the equivalent of post-dated cheques.

This is all part of the bitcoin system and requires no central authority so you don't need a bank or trust lawyer acting as an expensive middle man.

In a way, the bitcoin currency is just the first app' (software application) to run on the bitcoin platform. And just as with the launch of the iPhone, the built-in apps will soon be eclipsed by the innovation the system unleashes.

For example, the concept of coloured coins' would enable the bitcoin system to manage the ownership of real-world assets anything from shares to cars. A particular bitcoin would be coloured' to signify ownership of an asset.

Because the block chain is public, anyone can track the ownership of that Bitcoin (and so the asset itself) through every transaction it has ever been involved in, and see who now owns it. The bitcoin is purely a token it's like writing an IOU for a car on a dollar bill, then storing it in a public ledger.

Each colouring scheme defines its own rules, such as who is allowed to issue the coins, how they are redeemed, and the transactions permitted. One use would be for smart devices to hook up to the bitcoin network.

Let's say you own a device that streams films from the internet (a smart TV, maybe). To do so, it has to connect to a central server (such as iTunes) to implement digital rights management (DRM) and check that you've bought the film, before allowing it to be played. This means the film's producers can only sell via these services. It also means that if the service shuts down, you could lose access to your film library.

In 2008, Microsoft announced it would shut down its MSN Music service (with its ironically named PlaysForSure DRM) and that its US customers would no longer be able to use it to transfer their music to their devices.

Coloured coins would avoid the need for such services. The bitcoin system itself would hold the entitlements. Your device could prove to any server storing the film that it was entitled to play it.

And because bitcoin allows for conditions to be attached to each transaction, films could be rented, sold, re-sold, loaned (one area where physical DVDs still beat online films, for example), or even bequeathed, all at the discretion of the owner.

The filmmaker would control the terms on which it offered its films, which, through competition, would result in a balance being struck between the producers and consumers.

Just as the internet has cut out layers from the distribution network for books and films, bitcoin could take it further, allowing producers to sell direct to consumers, without virtual middle-men, such as iTunes or Amazon, being involved.

An investment revolution

A company could issue its own shares in the form of coloured coins. The ownership and trading of these would be done via the bitcoin system. No need for share registrars. What would existing organisations do? Offer ancillary services (eg, for collecting dividend payments on behalf of a shareholder)? Will nominee services disappear? Will new low-cost' venues cutting out a large part of the costly IT infrastructure currently needed emerge for trading small business shares? Much will depend on the pace of regulatory change in the area but the potential is vast.

So the best way to invest in Bitcoin is not to buy the currency, or a high-powered mining set-up, but companies that can offer services and products that run on top of the bitcoin network.

Unless you're a venture capitalist, that means you'll have to be patient for now but in the longer run, be prepared for bitcoin to be as big a gamechanger as the internet.

Ken Tindell is an entrepreneur with experience in various industries, including automotive, embedded internet, and web TV. He currently runs a software development company.