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Bitcoin, Blockchains and Regulation

Blockchain-based technologies could revolutionize not only how companies operate but also how regulators and law enforcement officers perform their supervisory and investigative duties. Could the transparency, user-defined privacy and programmability of blockchains minimize market failures and reduce the need for regulation?

The First Blockchain

Through an ingenious combination of well-known technologies and economic incentives, Bitcoin brought about one of the most exciting and potentially transformative inventions in modern history —the ability to achieve consensus and guarantee truth without a central authority and with censorship-resistance. So revolutionary is this breakthrough that it has ignited a gold rush of investment and creativity similar to the pre-browser years of the Internet.

Blockchains were born with Bitcoin. And by Bitcoin I do not mean bitcoin (lowercase), the volatile and supposedly anonymous virtual currency that is not controlled by any third party, and allows individuals with Internet connectivity to send and receive value in any amount, globally, and almost for free. Lowercase bitcoins are an inextricable component of this new technology, and a uniquely significant one that transcends their monetary nature. They are digital containers that can be programmed to represent digitally “anything of value,” such as a security, a medical record or a work of art.

Bitcoin (uppercase) is an open source software that runs as a distributed network made up of thousands of smaller computers —nodes— that jointly certify the ownership and transfer of value without having to trust one another. In this sense, Bitcoin acts as as a semi-autonomous robot that utilizes advanced cryptography to enforce rules embedded in its core that guarantee everyone’s honest behavior. Part of that enforcement mechanism consists of recording transactions in a counterfeit-proof and immutable ledger that is also distributed to all participants in the network. This public ledger —Bitcoin’s database— is called the blockchain. Continue reading

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