Bitcoin, and the other cryptocurrencies it spawned, are often described as forms of “digital cash”. This is a useful analogy but also obscures an exceedingly important point: all transactions are visible to everybody and in a form that allows the bitcoin units associated with every payment to be tracked for ever more*. This means that Bitcoins are not fungible. This is huge.

It is huge because it means that Bitcoin isn’t just a currency and payment system; it is a globally distributed asset register.

Consider this scenario:

Imagine I own some shares in Facebook. I could publicly announce that a particular Bitcoin (strictly, a transaction output) that I owned actually represented those shares. Thus, somebody who wanted to own these shares could pay me the market price (less a discount, perhaps, to reflect their ongoing counterparty exposure to me) and I would transfer the Bitcoin to them. This transaction would be visible to everybody and anybody aware of my public announcement would know which Bitcoin address now owned those shares.

If Facebook issued a dividend, I would pay it to the Bitcoin address that owned the coin on the relevant date.

The owner could sell it on – and would have no ongoing participation in the scheme – I would be the only entity whose honesty and solvency would need to be relied on.

One could extend this further to encompass other corporate actions and to allow merging and splitting of claims.

Call me a “registrar” or a “custodian” and it’s not a stretch to imagine the Bitcoin architecture forming the basis of a next-generation securities servicing system for the world: is there a whole layer of cost that could be taken out of that industry?

You can go further

Why does the asset have to be a security? Imagine it is a parcel of land or piece of property: now you have a land registry.

This idea of “tagging” Bitcoins so that they have value independent of their currency value is known as colored coins.

The core Bitcoin development team are working on updates to Bitcoin’s design to make this idea easier to implement but, even at a theoretical level, the power is clear.

Coindesk has a nice précis of my interview with Finextra on this topic (scroll down to the third section of the article).

* various mechanisms exist to obscure transactions but they are not relevant to this discussion.