Your Letter to the Editor regarding the hacking of a Bitcoin exchange perpetuates this quaint and

popular notion that Bitcoin system is this great invention that eliminates friction in payments as well
as fraud and pretty much all ills of the society.
The fundamental error of this notion is that it fails to look at Bitcoin (and similar other crypto
currencies) as two distinct and separated things one is the blockchain or distributed ledger model
/ technology and the other are the currencies themselves.
I wrote about this for my friends so I will just copy and paste below:
"Blockchain" technology is inevitable but Bitcoin and other "crypto-currencies" are irrelevant
Blockchain technology as a fundamental re-ordering of infrastructure of money flows in global financial
system is pretty much inevitable. Bitcoin or any other crypto-currencies such as ether are unnecessary
which is why they will remain marginal or disappear.
Blockchain model accomplishes the objective of instantaneous and virtually cost-free transfer of money
without the need to invent any new currency to do it. USD and EURO are perfectly fine as they are.
The way it works in the physical world is that if Steve wants to give me $75 he looks into his wallet, takes
out $75 in bills and gives them to me and I put them into my wallet.
In the non-physical world, if he wants to do the same thing, he tells his bank to reduce the amount on
deposit in his account by $75 and his bank in turns tells my bank that they should increase the amount
on deposit in my account by $75. The intermediate step in the process is that the bank account that my
bank holds with Steves bank or with a clearing institution gets credited with $75 which then is moved to
my personal account. All of this is accomplished through exchange of information / messaging of some
sort (including SWIFT or ACH) and takes time and clearly involves some friction and infrastructure which
means cost.
What if there was a way of Steves and my wallets existing as electronic records and maintained as such
in 100 (or 1,000) different places at the same time? When Steve in this system makes an entry to reduce
his balance by $75 and increase my balance by $75, this information gets instantaneously updated in all
100 locations of the common ledger and therefore there is an audit trail and proof that this indeed
took place. The transaction that Steve initiated is a block which gets added to the chain (the
sequence of all transactions in a ledger). This ledger is kept in 100 (or 1,000) places all at once and
everyone can look at it to verify transactions and resulting balances.
This is what Bitcoin and others do and as a technology, it is inevitable but it will be done with USD and
EURO and not another completely new currency.
The reason why it is inevitable is because, one, it is so darn compelling and two, at this point it is only a
computing problem. There are no other show stoppers for it - simply the magnitude of transactions in
the world financial system is such that this scalability issue has to be solved in order for what is
fundamentally a simple concept to become reality.

To give a sense of it, the current volume of Bitcoin transactions is 200,000 /day while the Visa system
handles 2,000 transactions per second (and has computing capacity to handle over 50,000 transactions
per second). So Visa handles the entire daily transaction volume of Bitcoin in about 1 1/2 minutes and
could handle it in 4 seconds if need be. Visa accounts for about 50% of credit card transactions globally
and is currently running 1,000x or 3 orders of magnitude higher volumes than the Bitcoin system does.
In order for all of the world transactions, including funds transfers and debit transactions to be handled
by a blockchain system, the scale of capacity of the system would probably have to be at least 100x
what Visa can do today to start with and it would need to have the capacity to grow from there.
While a hard problem it is also just a matter of computing power, speed of transmission and
algorithms safeguarding the integrity of the entire system.
Decisions would have to be made about how many nodes there would be that keep the entire
blockchain (is it 100 or 1,000 or 10,000) and there would have to be a system agreed upon by all
participants as to how the software would get updated or altered and so on. Not much different in
principle than what ICANN was in the early days of the Internet. Or other similar standard setting
entities are today.
Some more data that gives perspective on the issue are that the current size of the blockchain ledger
for Bitcoin is around 100 GB (so fairly trivial) and current number of wallets registered on it is around 8
Million. Just as when one backs up computer files to the cloud, smart algorithms make it possible to
avoid having to transmit the whole 100 GB file between all the nodes each time a transaction gets added
in one location. Only the changes from a previous synchronization are updated.
Just as clearing systems used to update once a day and now do it 3 times a day or whatever, the time
between synchronizations can be driven down over time. Perhaps you start with one minute or less and
move down from there. Again, that is a technological issue and even at its current very small scale
Bitcoin has already run into scalability issue where sometimes it takes transactions up to 40 minutes to
be verified (similar to Visa merchant terminal saying approved when you pay with your card at your
table in a restaurant or in a store).
Compared to the resources that serious financial institutions and IT companies can put behind a system,
Bitcoin is like go-carts compared to a Formula 1. Just by involvement of different players one would get
a couple of orders of magnitude improvement in system capacity even today. Some years down the road
as all of the computing capabilities increase, this becomes not only possible but inevitable.
Another big issue would be the switchover moment. It would make most sense if a massive switchover
occurred at one time from all the disparate other systems to one comprehensive new one. This is not
the kind of a thing that could grow organically - the very nature of it is that it should be global and allencompassing. One could imagine that it would take some time to build the system, test it, get the buy
in and then get ready for one massive switchover.
The most likely path is that a consortium of financial institutions and IT companies will create a system
which will then solicit backing of other financial institutions, Central Banks and other government
authorities for broad acceptance and regulation of the system.

Miljenko Horvat
Senior Advisor
The Riverside Company
www.riversidecompany.com