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Bitcoin does not exist physically, although you must exchange hard currency to acquire it. Unlike cash, Bitcoin resides in your “electronic wallet” as a computer file. A network tracks the transfer of the computer files from purchaser to seller, but does not record the nature of the transaction. The value of Bitcoins can fluctuate significantly - often in a matter of minutes.

Virtual currency has not yet become a mainstream form of payment, owing in significant part to concerns about security and reliability. In its early days, Bitcoin was almost exclusively associated with nefarious activities, such as anonymously purchasing guns or drugs online. Even when used to make legitimate purchases, the lack of legal protections makes transactions more susceptible to fraud.

Bitcoin technology

The technology behind Bitcoin is known as blockchain. In basic terms, blockchain serves as a public ledger of all Bitcoin transactions that have ever been executed. Each time a transaction is completed, a new block is added to the database in a linear, chronological order. Transactions are authorized using a mathematical formula, and each verified computer that is connected to the Bitcoin network receives a copy of the blockchain, which eliminates the need for banks.

Blockchain tech to be implemented elsewhere

While still in its infancy, several financial institutions are exploring ways to use blockchain to modernize and streamline their operations. In May, Nasdaq announced that it would begin using blockchain in several applications. It will first deploy the new technology to manage the issuance and transfer of stocks on its Nasdaq Private Market platform, which handles trades in private company stocks. According to Nasdaq CEO Bob Greifeld, blockchain is expected to help “modernize, streamline and secure typically cumbersome administrative functions.”

Nasdaq is not alone in exploring the potential of blockchain. As reported in the Wall Street Journal, Swiss bank UBS is working to develop a new “utility settlement coin,” which could be used by banks across the globe to as a basis to settle mainstream financial markets transactions, utilizing a blockchain based platform. Unlike Bitcoin, the new virtual coin would be tied to real-world currencies and central bank accounts. One of the goals of adopting blockchain technology is to enable financial institutions to settle trades in seconds rather than days. According to proponents of the proposal, the new coin could also result in lower risk, decreased operational costs, and greater efficiency in transactions between financial institutions.

Finally, as further evidence of blockchain’s potential for future usefulness in financial markets, Blythe Masters, the former JPMorgan executive credited with developing the concept of credit default swaps, is now consulting with a start-up focused on the use of blockchain to modernize the financial industry. She characterized the need to reduce the costs and inefficiencies in financial transactions as “one of the great challenges of our time.”