The-Accountant-Jan-Feb-2018

COVER STORY
Musk, the billionaire South African-born
founder of Tesla, was constrained to deny
that he is Satoshi Nakamoto. From the
name, everyone assumes that there is
some sort of Japanese connection.
What we know for certain is that
there is no official issuing authority
for Bitcoin, that it has no physical
substance, there is no way of regulating
it, there is no central repository, no
single administrator.
The concept of Bitcoin was
first made public in 2008, one year
before the concept went live, in a
scholarly paper that initially attracted
limited interest outside the world of
computer geeks. The author contended:
“Commerce on the Internet has come
to rely almost exclusively on financial
institutions serving as trusted third
parties to process electronic payments.
While the system works well enough
for most transactions, it still suffers
from the inherent weaknesses of the
trust based model.”
So the basic proposition was that,
for e-commerce to take off, the line
community needed a new form of
money, outside the traditional banking
system, that could give an online seller
the assurance that, once he had received
a payment, that payment would be final.
Or, as the author of the original Bitcoin
paper explained it: “Completely nonreversible
transactions are not really
possible, since financial institutions
cannot avoid mediating disputes. The
cost of mediation increases transaction
costs, limiting the minimum practical
transaction size and cutting off the
possibility for small casual transactions,
and there is a broader cost in the loss
of ability to make non-reversible
payments for non-reversible services.
With the possibility of reversal, the
need for trust spreads.
“Merchants must be wary of their
customers, hassling them for more
information than they would otherwise
need. A certain percentage of fraud is
accepted as unavoidable. These costs
and payment uncertainties can be
avoided in person by using physical
currency, but no mechanism exists to
make payments over a communications
channel without a trusted party.”
Having summarised the challenge as
he saw it, the author proposed a solution
that, over the next eight years, was to
make him, or her, or them, or whoever
Satoshi Nakamoto might be, a Dollar
billionaire many times over: “What is
needed is an electronic payment system
based on cryptographic proof instead of
trust, allowing any two willing parties
to transact directly with each other
With other forms
of monetary
transaction,
there is a transfer
of something
traceable. It can
be a metal coin, a
paper note issued by
a bank, a registered
bond, a cheque
or draft drawn
on a bank, with
an account being
debited and another
account credited for
each transaction.
without the need for a trusted third party.
Transactions that are computationally
impractical to reverse would protect
sellers from fraud, and routine escrow
mechanisms could easily be implemented
to protect buyers. “
Within one year of the publication
of the original paper, Bitcoin was a
reality, and its growth, although slow
at first, has suddenly exploded during
2017. Increasingly, Bitcoin is being
used for online purchases and payments
without having to go through the
banking system. Some users are
especially attracted by the anonymity,
untraceability, and secrecy of Bitcoin.
The increasing popularity of the
product has made it a target of investors
looking for untraceable profits, and
there are several hedge funds that have
been set up and attracted millions of
Dollars of subscriptions for investment
solely in Bitcoin. It is this speculative
investment that has been largely
responsible for the increase in the price
of a single Bitcoin from around $1,000
at the beginning of 2017 to more than
$10,000 at the end of the year. In the
short time between my having started
this article and right now, the price has
increased by another $1,000.
The success of Bitcoin has led to an
explosion of “me-too” products being
brought to market, with some of
them, in the space of just weeks, or
days, or even hours, appreciating in
price by hundreds of a per cent. This
phenomenal growth is now raising
concern, not least because there are
no standards at all for accounting
for crypto-currency transactions.
The biggest risk inherent in Bitcoin,
or any other crypto-currency, is the
anomaly of double spending, and for
anyone trained in the management of
conventional money, that is a difficult
concept to grasp.
With other forms of monetary
transaction, there is a transfer of
something traceable. It can be a metal
coin, a paper note issued by a bank,
a registered bond, a cheque or draft
drawn on a bank, with an account
being debited and another account
credited for each transaction. But
crypto-currency is not physical, and
there is no centralised accounting
system behind it, it is a self-contained
electronic script of computer code. It is
all too easy for the code to be cloned,
and sent to more than one party, in
exchange for value more than once.
Satoshi Nakamoto claimed to have
solved this inherent Challenge: “The
problem of course is the payee can’t verify
that one of the owners did not double-
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