Amid all the hoopla around Bitcoin, some companies are developing technologies that would enable governments or large companies to mint digital currencies tied to existing fiat money.
Amnon Samid is CEO at Tel Aviv-based BitMint, which is looking to license its technology to governments or other potential currency issuers. He told an audience in Hong Kong that BitMint is in exploratory talks with three central banks.
In an interview with DigFin, Samid, a mathematician, argued that the encryption around crypto-currencies such as Bitcoin and Ethereum is breakable, at least in theory, and that issuing authorities will want to use digital currencies that are engineered on very different principles.
The biggest difference – one that would leave Bitcoin partisans cold – is that BitMint’s technology allows for a centralized authority to mint digital currency. Although issuers might still rely on distributed ledgers (such as blockchain) to prevent fraud or accounting errors, they would retain control over supply and design.
“Investors who were initially enthusiastic about Bitcoin are now separating Bitcoin from the blockchain,” Samid said. “They like blockchain but more see Bitcoin as speculative. BitMint is non-speculative” because it is anchored to an underlying commodity, such as dollars, gold, or real estate.
Bitcoin is very, very difficult to hack. (The issue of fraud among some exchanges or its use for illegal activities is a separate matter.) In the case of crypto-currencies, however, Samid says there is no mathematical proof that they are impervious to being hacked. They are just difficult to break: so difficult that only the NSA and its counterparts in Russia or China – in other words, those with the computing resources to engage in massive brute-force attacks – could possibly penetrate the code.
But that leaves Bitcoin and its brethren potentially open to manipulation or counterfeiting by governments.
“Even the strongest encryption is susceptible to brute-force attacks,” Samid said. “To use currencies that are based on algorithmic complexity is to sit on a technological Titanic.”
That is because encryption relies on algorithms to bridge the encrypted gobbledygook and a plaintext (genuine, readable) message. He says these algorithms, although very clever, are “pseudo random”. In theory, at least, a massive attempt to decipher the pattern, through billions of trial-and-error attempts, can discover the key to unlock the encrypted chain of data, the ones and zeros that define a Bitcoin’s value and identity, and make it money (akin to the serial numbers on a dollar bill).
BitMint’s technology, Samid says, works on a different principle. A hacker, instead of searching for a needle of plaintext in a haystack of encrypted messages, is given a haystack of plaintext – making it impossible to know which message is the true one without possessing the sender or receiver’s key. ( Samid calls this defense strategy ‘equivocation’.)
And the secrecy around which plaintext message is the correct one is based on what Samid calls “pure” or “true” randomness, which is ultimately based on observable physical phenomenon. He would not say what this was – that would be giving too much away – but he said DigFin was in the right direction with examples of solar flares, seismic activity or the motion of water molecules in the ocean.
Centralized and tethered
Aside from the different ways to secure digital money, there are different ways to create it.
Existing crypto-currencies have been defined by Bitcoin, in which anonymous programmers have created something that is global, decentralized (like gold, its existence doesn’t depend on anyone’s will), and with a fixed supply: 21 million units, in the case of Bitcoin, generated through a lottery-like process called mining. (Anyone can mine by using computers to solve mathematical problems to win, effectively, a lottery ticket for free Bitcoins.) And while a bitcoin’s code contains its value, it doesn’t include an identifier, making it hard to trace, and offering a degree of anonymity.
BitMint’s technology embeds identification along with value in its digital money. That makes Bitmints traceable as well as tradable. “Some governments want a legal digital currency,” Samid said. “They would be the authority issuing it, using a centralized ledger that authenticates transactions.”
Governments eager to limit the use of cash can use this technology to phase populations from paper to digital, Samid said.
The technology also has uses for big companies that could issue their own digital currency, Samid said. The technology can be ‘tethered’ to other asset or rules. For example, digital money could act as a claim on a foreign-exchange transaction, or the extension of credit. It could also be embedded with smart contracts so that users can only spend or receive Bitmints under specific conditions – such as making a payment eligible to a single counterparty, or on certain days, or upon delivery of a good.
No one is yet using Bitmints, and Samid says potential clients are wary of being the first to try it. But what seems likely is that governments, companies and individuals face a growing choice in how they wish to issue, trade and store digital money.