The Five Parties Model for Bitcoin Investments

Yes, MtGox is having problems. No, that doesn’t mean that the whole Bitcoin network is going to go away. In fact, some say that it’s going to help make sure things are more secure going forward. If you want to continue investing in bitcoins and want to stay safe, Bitcoin Magazine had a really nice article about the Five Parties Model being used for Bitcoin investment. We’re going to break it down for you, so that you can learn how to keep your investments in Bitcoin as safe and secure as possible.

MtGox has blamed all their woes on the malleability bug, but this is suspect for a number of reasons. For one, they’ve lost almost all of their bitcoins. Many are saying that it’s really a problem of bad management at MtGox. This has been said by anonymous people saying they worked for the company as well as many blogger pundits over the last few weeks – if not months. Whatever the cause of the demise of MtGox, there are things that you can do to help make sure your investments are sound.

While technology is important if not integral to the Bitcoin network, nothing should ever rely solely on technology. As seen with the Bitcoin bugs that pop-up occasionally, no technology can be trusted 100%. If you do trust it completely, there’s a big chance you’re going to get burned eventually. Bitcoin needs to make sure they’re grounded in the “real world” outside of technology alone if they are going to survive and thrive.

The Five Parties Model for Bitcoin

Here’s a breakdown of how the Five Parties Model can be used for investing in Bitcoin.

  1. Issuer – This is the agency or institution that guarantees the value of the currency. Currently, any exchange or service that allows you to store bitcoins is acting in part as as issuer.  They’re needed, of course, but they’re going to have to change some if they want to regain the public’s trust when it comes to Bitcoin.
  2. Trustee – This role – someone who verifies the transactions – could be handled by attorneys at an outside legal firm, freeing up the exchange to be able to concentrate on other matters. This person would be responsible for transferring BTC to and from the escrow account or “vault” where they are stored for safety. The person who takes on the role of trustee in this business model is going to need to be reputable and trustworthy. 
  3. Manager – The manager in this system is the one who talks to the trustee about what needs to be done – invalidating currency, etc. They would handle the daily movement of bitcoins. For example, they may receive 100 BTC in a day and pay out 75 BTC. In that case, they would talk to the trustee at the end of their shift and move the balance to the vault for safety.
  4. Escrow / Vault – Safety on the Internet is tough these days, which is why someone outside of the bitcoin Exchange should be handling the storage and release of all bitcoins held  by the exchange for other people.  By moving the storage of BTC off-site and allowing a third-party that specializes in “bulletproof” servers, the Bigcoin Exchange will be able to have less problems with hacking – the reason most exchanges fail.
  5. Public Auditor – Paid auditors have run into problems in traditional financial industries, and this is why the public may act as a better auditor. They have no vested interest because they’re not receiving a paycheck by the Bitcoin Exchange. To do this, the Bitcoin Exchange would have to “open the books” and allow the public to see what’s being received and given out, but this is a good thing because it holds them more accountable. There’s less of a chance a big failure like MtGox will happen again.

Looking at the five roles above, it’s easy to see that Bitcoin would benefit greatly from using some of the wisdom of the Five Parties Model. While it would mean a little more regulation, this isn’t necessarily a bad thing if it ensures better safety and security of investments. Because if Bitcoin becomes safer, there’s a lot better chance of more people beginning to use it. And that’s better for everyone involved. 

What do you think? Is the Five Parties Model something that would help Bitcoin or harm it? Leave a comment below and join the conversation with your opinion. When it comes to the Bitcoin Network, one of the best things is all the passionate people from around the world who are involved. Now is the time to become involved, and Bitcoin Basics 101 is the place to do it.