Tuesday, October 21, 2014
When a new currency code becomes adopted by the independent and nonpolitical International Organization for Standardization (ISO), it immediately enters the database tables upon which Visa, MasterCard, PayPal, SWIFT and other clearing networks rely.
ISO 4217 is a standard published by the ISO, which delineates currency designators, country codes (alpha and numeric) and references to minor units in three separate tables.
Now, a distributed currency having an identifiable code in a centralized database may not seem like much of an accomplishment.
However, when we consider what this means for integration into existing networks, trading systems and software accounting systems, it becomes much more significant. All the more so when we consider that a code prefix of 'X' denotes a non-national affiliation or a monetary metal such as gold or silver.
Instantly, bitcoin as XBT will be available as a selectable clearing and settlement unit for any business that chooses to offer and implement bitcoin. Of course, designing and managing the necessary settlement and hedging mechanisms will be a different matter altogether. Certain clearing networks may effectively become bitcoin exchanges.
With the three-character code having been in informal usage since early 2013, a formal application for XBT is nearing completion by the Financial Standards Working Group within the Bitcoin Foundation. This effort has its origins in a petition submitted by Emelyne Weiss that circulated on Change.org, the world's platform for change. The petition closed with 836 supporters.
Since the decentralized bitcoin has a peer-to-peer block chain rather than an 'official' currency manager, a central bank or an existing institution such as SWIFT may also be necessary to support the ISO application for XBT. As leaders of financial innovation through their Innotribe initiative, early indications from SWIFT senior management are that they would be supportive of such an application, if required.
Recently, the topic of XBT and the need to standardize various subunits has been much debated on Reddit and other social media outlets, unfortunately causing more confusion than clarification. Let's examine some of the top-level issues.
Why was XBT selected and what happens to BTC?The code XBT was selected because the prefix 'X' denotes a non-national affiliation or a monetary metal such as gold or silver. Technically, BTC would be unavailable due to the fact 'BT' already represents the country of Bhutan.
The first two letters of the code are the two letters of the country code (as with national top-level domains on the Internet) and the third is the initial of the currency itself. In the case of the dollar (USD), US represents the country and D represents the initial of the currency.
Most likely, BTC would still remain in colloquial usage because it is already widely recognized by the community. Just as slang terms for money exist around the world, BTC shorthand would be used similar to how 'bucks' or 'quid' are used for other currencies. In this scenario, I expect BTC to continue to represent one full bitcoin unit.
Why does XBT have to represent a full unit of bitcoin?One XBT unit as listed and recorded within ISO 4217 would have eight subunits or decimal places to the right of the decimal point. The rationale for this is that a neutral global default for bitcoin around the world cannot deviate from the unit's representation on the block chain (as expressed in the reference implementation) and the bitcoin integer in the core protocol is not changing.
One bitcoin on the block chain must equal one bitcoin in the formal standards world or else processing errors would be potentially catastrophic.
Even though eight decimals was selected as the starting point for the bitcoin integer, that number may need to be increased over time and increasing the amount of decimal places for bitcoin would hardly be a contested issue by the miners when the time comes.
The code representation within ISO 4217 cannot be changed up and down due to the varying number of decimal places in the core protocol. It must remain static.
Bitcoin is correctly placed, alongside gold, as a digital cryptographic commodity. So, just as gold (XAU) may trade in some areas as kilos or kilograms, the global default standard for pricing and measuring quantities of gold bullion remains the troy ounce.
One troy ounce is currently defined as 31.1034768 grams and is equivalent to approximately 1.09714 avoirdupois ounces. XAU denotes one troy ounce of gold and 'XAU/USD' means the price of 1 troy ounce of gold in US dollars.
How are the subunits related to XBT and the ISO standard?Despite the fact that several names for bitcoin's minor units have been proposed, only three of the minor units, or subunits, have achieved a consensus within the bitcoin economy.
The third space after the decimal point (10−3) is commonly referred to as 'millibit' or mBTC. The sixth space after the decimal point (10−6) is commonly referred to as 'bit' or μBTC. The eighth space after the decimal point (10−8) is commonly referred to as a 'satoshi', the smallest available amount of bitcoin today.
These existing minor units of bitcoin will be submitted in the ISO application for XBT and it is not required for all of the individual minor units to be submitted.
To better facilitate consumer applications, some bitcoin operators may elect to provide a choice for display preferences. Several applications and web sites, such as BitcoinAverage, already permit toggling between bitcoin and millibit for display purposes.
Recently, some exchange operators have also expressed an interest and willingness to display prices in bits, so that only two decimal places exist to the right of the integer. For instance, KnCMiner embraced the bits display option for its wallet app. These moves could be especially useful for accounting packages that typically accommodate only two decimal points.
Strong opinions exist on all sides for going to a bits display, a millibits display, or remaining with a full bitcoin display.
As a consensus emerges, it is also perceived as useful to utilize one expression for retail consumers and to maintain a full bitcoin expression for wholesale level or institutional trading. This structure is entirely achievable because dual display options can be easily adopted by software providers.