Testimonyof

JerryBrito
ExecutiveDirector,CoinCenter
beforethe
NewJerseyAssembly
FinancialInstitutionsandInsuranceCommittee
HearingonDigitalCurrency

February5,2015

ChairmanCoughlinandmembersoftheCommittee,mynameisJerryBritoandIamthe
ExecutiveDirectorofCoinCenter,anonprofitresearchandadvocacycenterfocusedonthe
publicpolicyissuesfacingdigitalcurrencies.Thankyouforinvitingmetoparticipateinthis
hearing.

Iwouldliketoprovidesomebackgroundonthetechnologywearediscussing,explainsomeof
theregulatoryactivityattheFederallevel,andansweranytechnicalquestionsyoumighthave.

Bitcoinisfrequentlydescribedasadigitalcurrency.Whilethatdescriptionisaccurate,itcan
bemisleadingbecauseitisatoncetoobroadandtoonarrow.ItistoobroadbecauseBitcoinisa
veryparticularkindofdigitalcurrencyacryptographybasedcurrency(indeed,itisthefirstof
itskind).ItistoonarrowbecausealthoughcurrencyisoneaspectoftheBitcoinsystem,Bitcoin
ismorebroadlyanInternetprotocolwithmanyapplicationsbeyondpaymentsormoneytransfer.
ThinkofitlikeemailortheWebanopennetworktowhichanyonecanconnectwithout
permissionfromacentralauthority,anyonecansendamessagetoanyoneelse,andontopof
whichyoucanfreelybuildmanydifferentkindsofapplications.

Onlinevirtualcurrenciesarenothingnew.Theyhaveexistedfordecades.FromWorldof
WarcraftGoldtoFacebookCredits.Neitherareonlinepaymentssystemsnew.PayPal,Visa,and
WesternUnionPayareallexamples.SowhatisitaboutBitcoin,andsimilarcryptographybased
currencies,thatmakethemunique?

Bitcoinistheworld'sfirstcompletelydecentralizeddigitalcurrency,andit'sthe"decentralized"
partthatmakesitunique.PriortoBitcoin'sinventionin2009,onlinecurrenciesorpayments
systemshadtobemanagedbyacentralauthority.Forexample,FacebookissuingFacebook
Points,orPayPalensuringthattransactionsbetweenitscustomersarereconciled.However,by
solvingalongstandingconundrumincomputerscienceknownasthe"doublespending"
problem,Bitcoinforthefirsttimemakespossibletransactionsonlinethatarepersontoperson,
withouttheneedforanintermediarybetweenthem,justlikecash.

ComparingBitcointotraditionalpaymentsandmoneytransfersystemshelpsexplainthe
distinction.BeforeBitcoinsinventionin2008,onlinetransactionsalwaysrequiredatrusted
thirdpartyintermediary.Forexample,ifAlicewantedtosend$100toBobovertheInternet,she
wouldhavehadtorelyonathirdpartyservicelikePayPalorBankofAmerica.Intermediaries

likePayPalkeepaledgerofaccountholdersbalances.WhenAlicesendsBob$100,PayPal
deductstheamountfromheraccountandaddsittoBobsaccount.

Withoutsuchintermediaries,digitalmoneycouldbespenttwice.Alicecouldsend$100toBob
byattachingamoneyfiletoamessage.Butjustaswithemail,sendinganattachmentdoesnot
removeitfromonescomputer.Alicewouldretainaperfectcopyofthemoneyfileaftershehad
sentit.Shecouldtheneasilysendthesame$100toCharlie.

Bitcoinsinventionisrevolutionarybecauseforthefirsttimethedoublespendingproblemcan
besolvedwithouttheneedforathirdparty.Bitcoindoesthisbydistributingthenecessaryledger
amongalltheusersofthesystemviaapeertopeernetwork.Everytransactionthatoccursinthe
Bitcoinnetworkisregisteredinthisdistributed
public
ledger,whichiscalledtheblockchain.
Newtransactionsarecheckedagainsttheblockchaintoensurethatthesamebitcoinshavenot
beenpreviouslyspent,thuseliminatingthedoublespendingproblem.Theglobalpeertopeer
network,composedofthousandsofusers,takestheplaceofanintermediaryAliceandBobcan
transactonlinewithoutathirdpartyintermediary.

Andhowisthispossible?WithBitcoin,transactionsareverified,anddoublespendingis
prevented,throughthecleveruseofpublickeycryptography.Publickeycryptographyrequires
thateachuserbeassignedtwokeys,oneprivatekeythatiskeptsecretlikeapassword,and
onepublickeythatcanbesharedwiththeworld.WhenAlicedecidestotransferbitcoinstoBob,
shecreatesamessage,calledatransaction,whichcontainsBobspublickeyandhowmany
coinssheissending.Shethensignsitwithherprivatekeyandbroadcaststhemessageoverthe
network.BylookingatAlices
public
key,anyonecanverifythatthetransactionwasindeed
signedwithher
private
key,thatitisanauthenticexchange,andthatBobisthenewownerof
thefunds.Thetransactionandthusthetransferofownershipofthebitcoinsisrecorded,
timestamped,anddisplayedinoneblockoftheblockchain.Publickeycryptographyensures
thatallcomputersinthenetworkhaveaconstantlyupdatedandverifiedrecordofall
transactionswithintheBitcoinnetwork,whichpreventsdoublespendingandfraud.

Outoftechnicalnecessity,transactionsontheBitcoinnetworkarenotdenominatedindollarsor
eurosoryenastheyareonPayPal,butareinsteaddenominatedinbitcoins.Thismakesbitcoina
virtualcurrencyinadditiontoadecentralizedpublicledger.Thevalueofthecurrencyisnot
derivedfromgoldorgovernmentfiat,butfromthevaluethatpeopleassigntoit.Thedollar
valueofabitcoinisdeterminedonanopenmarket,justasistheexchangeratebetweendifferent
worldcurrencies.Thetotalnumberofbitcoinsthatwilleverbeissued,aswellastherateat
whichtheyarealgorithmicallyreleasedintotheecosystem,isnotdeterminedbyanyperson,
company,orcentralbank,buthasinsteadbeenpredeterminedatthetimetheprotocolwas
established.

Todate,bitcoinshaverepresentedmoneyatafloatingexchangerate,andtheBitcoinnetwork
hasbeenemployedasafastandinexpensivepaymentsormoneytransfersystem.Butthereisno
reasonwhyparticularbitcoinscouldnotrepresentsomethingbesidesmoney.Ifweconceiveof
bitcoinssimplyastokens,thenotherapplicationsbecomeapparent.Forexample,wecouldagree
thataparticularbitcoin(or,indeed,aninfinitesimallysmallfractionofabitcoinsoastoallow

formanytokens)representsahouse,acar,ashareofstock,afuturescontract,oranounceof
gold.Conceivedofinthisway,theBitcoinblockchainthenbecomesmorethanjustapayment
system.Itcanbeacompletelydecentralizedandperfectlyreconciledpropertyregistry.

Bitcoinisthereforeanopenplatformforinnovation,justliketheInternetitself.Infact,Bitcoin
lookstodayverymuchliketheInternetdidin1995.SomedismissedtheInternetthenasa
curiosity,butmanycouldseethatsuchanopenplatformforinnovationwouldallowfor
worldchangingapplicationstobebuiltontopofit.Fewin1995couldhaveforeseenFacebook
orSkypeorNetflix,buttheycouldseethatallthebuildingblockswerethereforsomeamazing
innovations.Bitcoinislikethattoday.Wecan'tconceiveyetwhatwillbethekillerapplications,
butit'sprettyobviousthattheywillcome.

Bitcoinfacessomechallenges,however,andchiefamongthemisregulatoryuncertainty,
especiallyatthestatelevel.IfwethinkbackagaintotheearlyInternet,itwasnotuntilthe
governmentmadeitclearthatitwouldpursuealighttouchregulatoryapproach,thatInternet
innovationreallytookoff.Bitcointodayisinneedofasimilarcommitmentfromgovernment.

IfCoinCentercouldoffertwoguidingprinciplesforyoutousewhenconsideringpolicyrelated
toBitcointheywouldbeclarityandinnovation.Clarityintermsofhowexistingregulations
wouldapplytothisnewtechnologyrulesoftheroadforbitcoincompaniesseekingtooperate
inNewJersey.Andtoalwaysmeasurenewpoliciesagainsttheirimpactoncontinued
innovation.

Ifyouneedanyfurtherassistanceasyouconsiderdigitalcurrencies,pleasedonothesitateto
contactusatCoinCenter.Ourmissionistobuildabetterunderstandingofthesetechnologies
andtopromotearegulatoryclimatethatpreservesthefreedomtoinnovateusingblockchain
technologies.Wedothisbyproducingandpublishingpolicyresearchfromrespectedacademics
andexperts,byeducatingpolicymakersandthemediaaboutblockchaintechnology,andwhere
appropriateadvocacyforpoliciesatthestateandfederallevelconsistentwithourmission.For
yourreference,belowisalistofsomeofCoinCentersplainlanguagebackgroundersthatyou
maywishtoreference.MoreinformationisavailableonourwebsiteatCoinCenter.org.

HowAnonymousisBitcoin?
byAdamLudwin,Jan20,2015.
AdamLudwin,CoFounderofChain.com,differentiatesbetweenanonymityandprivacyin
financialtools.
http://coincenter.org/2015/01/anonymousbitcoin/

IsBitcoinRegulated?
byJerryBrito,Jan13,2015.
CoinCenterExecutiveDirectorJerryBritodebunksthecommonmisconceptionaboutBitcoin
thatitisnotregulated.
http://coincenter.org/2015/01/bitcoinregulated/

HowArePaymentswithBitcoinDifferentthanCreditCards?
byRichardGendalBrown,Jan1,
2015.
RichardGendalBrowncomparespayingwithBitcoinandpayingwithacreditcard.
http://coincenter.org/2015/01/paymentsecurity/

WhatisMultiSig,andWhatCanItDo?
byBenDavenport,Jan1,2015.
BenDavenport,cofounderatBitGo,simplifiesthetechnicaldetailsofmultisignature
transactions.
http://coincenter.org/2015/01/multisig/

WhatisBitcoinMining,andWhyisitNecessary?
byPeterVanValkenburgh,Dec15,2014.
PeterVanValkenburgh,CoinCentersDirectorofResearch,offersaplainEnglishexplanation
ofBitcoinmining.
http://coincenter.org/2014/12/bitcoinmining/

WhatareSmartContracts,andWhatCanWedowithThem?
byHoumanShadab,Dec15,
2014.
NewYorkLawSchoolProfessorandCoinCenterFellowHoumanShadabshareshowblock
chainscanmakecontractssmart.
http://coincenter.org/2014/12/smartcontracts/

HowcanBitcoinbeUsedforRemittances?
byBrockCusick,Dec2,2014.
AttorneyBrockCusickdescribesthepromiseBitcoinholdsforsendingmoneytooneshome
country.
http://coincenter.org/2014/12/remittances/

IsBitcoinsPriceVolatilityaProblemfortheTechnology?
byGilLuria,Dec2,2014.
WedbushsGilLuriashowswhyBitcoinsnotoriouspricevolatilityisnotasurprise,nora
dilemma.
http://coincenter.org/2014/12/volatility/

AreConsumerBitcoinBalancesEspeciallyVulnerabletoHacking?
byMikeBelshe,Dec1,
2014.
MikeBelshe,cofounderatBitGo,explainstherisksfacingconsumerswhoholdBitcoin.
http://coincenter.org/2014/12/consumersafety/

WhatareColoredCoins?
byBrockCusick,Nov30,2014.
AttorneyBrockCusickexplainswhyaBitcoincouldbecoloredandpotentialapplicationsof
suchcoins.
http://coincenter.org/2014/11/coloredcoins/