How will the Bitcoin split affect payments and fraud?
In the early months of 2016, one issue dominated all discussion in cryptocurrency: Bitcoin could split in two. Two factions in the developer community emerged over a particular topic and look to serve as the primary provider of currency going forward. Two forms of Bitcoin now exist : Bitcoin Core and Bitcoin Classic. According to tech blog The Verge, the acrimony increased to such a degree that there are now flame wars all throughout key forums related to Bitcoin, including Reddit. The payments industry must pay close attention to how this situation unfolds, as duplicates of practically the same currency can increase the risk of fraud outright.
A matter of size
The key point of contention in the Bitcoin split concerns the size of the blockchain. A miner creates a series of complex mathematical problems that a computer or supercomputer would solve. The computer then posts the proof to the blockchain, a public ledger, and in return receives bitcoins from a given block. The issue is there is a limit on the size of a block, which is one megabyte. The cap is supposedly in place because its designer, Satoshi Nakamoto, used it as a stopgap to address possible fraud concerns.
However, the size limit only functions well in a low-traffic environment because of the fixed rate of mining for bitcoins. As the cryptocurrency slowly gains mainstream acceptance, the rate of people receiving and using bitcoin will outpace the rate of mining. That creates multiple problems. The first is transactions take longer to complete, since everything must go through the blockchain. A longer time to validate a transaction means less certainty about whether someone gets paid. Unlike regular currency, cryptocurrencies like Bitcoin do not deliver the coins until the transaction is confirmed.
The second issue, as noted by BTC exchange CoinDesk, is it increases transaction fees. While the currency has a hard-coded fee of 0.0001 BTC, or approximately 4 cents, it establishes the priority line based on when a transaction is confirmed. The standard fee today may force a wait time of up to 13 hours to confirm. Paying more means a higher place in the line.
A split in principle
Some developers wanted to act on this problem by increasing the block size limit to 2 megabytes. They created their version of Bitcoin, called Classic, with this in mind. That’s where the conflict heated up: The core team of developers behind Bitcoin refused to accept this change for political reasons. Because the larger block size demands more computing power, it caters to miners with the infrastructure to do so. This centralizes power to some degree, going against the founding principle of having a currency without a central authority controlling it.
“The threat looms of a person double-spending the same Bitcoin.”
While at the moment ecommerce sites shouldn’t be too concerned about the split, it will become an issue if and when Bitcoin Classic performs a hard fork. In that situation, it will become an independent and separate currency from Bitcoin Core. However, as Cornell University noted, this opens up one of the key fraud issues concerning cryptocurrency: the double-spend problem. By concealing information from the recipient of a currency, a person can pass off the same exact currency twice. It’s like taking a dollar you just paid out of the cashier and spending it again without the store noticing. This form of fraud is easier when you reproduce the same information twice, a trivial matter in an age of digital piracy.
Satoshi Nakamoto implemented measures to address this problem. However, if the fork occurs, there will be two versions of the same exact currency floating around, making fraudulent activity a real threat. Banks and stores that use Bitcoin should watch the events between the Classic and Core developers closely.