How bitcoins work
This technology enables transactions and balances to be recorded digitally across a network. In distributed ledger technology, all participants keep a common ledger in their own decentralised computers. As all transactions are recorded, the ownership of each item can be verified at all times. In an open system, such as the bitcoin blockchain, participants approve transactions by solving a cryptographic problem. In a closed system, the algorithm may consist of identification of the participants and the condition that a qualified majority approve the transaction.
Potential benefits of virtual currencies
We have identified the following benefits of this new technology:
- Transactions can be effected directly between the originator and the recipient, without intermediaries and at low cost.
- The technology is fast and always available, allowing transactions to be processed almost in real-time and continuously. This means that a cross-border can be made within seconds.
- The data are reliable, because all transactions are verified decentrally. Furthermore, the system is resilient to cyberattacks, as information is stored in various locations across the network.
Potential drawbacks of virtual currencies
We have also identified drawbacks of the new technology:
- Governance issues: the network's decentralised nature obscures its members' responsibilities, meaning that none of them can be held accountable in the event of mishaps.
- The technology has not yet fully matured. Further standardisation is needed to ensure interoperability of new systems.
- If the traditional financial institutions or transaction processors were to introduce the new technologies, operational risks would emerge in terms of robustness, security and interoperability.
DNB acknowledges the potential of digital currencies
We acknowledge the possibilities offered by the new technology. Introducing it will also require adjustments on the part of central banks and supervisory authorities. One option would be for central banks to issue digital currencies themselves. Several foreign central banks are currently looking into this. We have built a test network based on blockchain technology for study purposes and to gain practical experience. We are also involved in a test in which a Dutch bank keeps its data in a blockchain network, which permits its supervisors to have current information at all times.