The surge of interest in digital payments is most clearly
reflected by the burgeoning interest in the bitcoin and other digital
currencies. Tens of millions in investment capital are pouring into dozens of
startups racing to create a robust marketplace for buying, selling and spending
bitcoins and the many alternatives coming onstream – seemingly every month.
Hardly a week goes by without some major story involving digital
currencies hitting the news streams (notably wild fluctuations in value,
unexpected shutdowns of operations, and persistent run-ins with regulatory
agencies over the use of digital currencies in money laundering and other
illicit activities). As a result, any industry conference sessions that focus on
bitcoin and its peers are spilling over with attendees.
So why all
the fuss? After all, digital currencies have been tried many times in the past
– who remembers short-lived alternatives Beenz and Flooz from the early days of
online commerce? Aren’t we moving, albeit belatedly, to a computer chip-based
mode of point of sale (POS) payments? Isn’t PayPal digital?
The fuss is quickly becoming less about an interesting,
even controversial, new ‘item’ in payments, and more about how bitcoin and
others appear to be redefining the payments space. Truly digital payments can
be used globally, by anyone, for any size and type of transaction and mainly for
free. No more central banks bailing out Wall Street or countries such as Cyprus
and Greece. No more arbitrary inflation or debit financing via unstrained
printing of ‘fiat’ currency – just auditable, non-repudiable transactions among
a worldwide community of users who share the same level of access and
Moreover, consider the possibilities for corporate
treasury: the ability to move ‘value’ across borders, without currency exchange
risks, or exposure (so far) to arcane, costly, and complicated tax treatments.
Such innovations could revolutionise the payments business, especially
streamlining the small business and business-to-business (B2B) segments.
On the other hand, bitcoin and the others – besides offering a vibrant
way to gamble online – could, in general use, usher in unprecedented
opportunities for crooks and hackers to expose the payments system to a host of
old and new dangers and risk. Just this month, authorities found and shut down a
website called Silk Road, which lived in the ‘deep web’ offering contraband
items such as drugs and guns, and accepted only bitcoins for payment.
In the US, mainstream merchant acceptance is miniscule, and both regulatory
authorities such as the Financial Crimes Enforcement Network (FinCEN), Commodity
Futures Trading Commission (CFTC), Securities and Exchange Commission (SEC) and
the courts are jumping into the growing debate and trying to decide what
protections and legal obligations are appropriate. At the same time looming
close by is the Internal Revenue Service (IRS), which is trying to figure out
where and how tax laws should apply. So there is time to figure out if bitcoin
is the right model for digital payments, or whether the industry needs to go
back to the drawing board.
One thing is certain: payments will never
be the same with all the attention bitcoin has generated. What’s missing now is
a formal environment for all the members of the payments ecosystem to get
together and devise a viable, efficient and economic way to pay and move value
In the past, such decisions might have come from the
payment card industry, but their inadequacies, stumbles and self-serving
infrastructure recommendations for Europay, MasterCard and Visa (EMV), near
field communication (NFC), online commerce and business payments has seen them
pushed into the background of standards-setting these days. More likely, the
Federal Reserve Banks (FRB) and perhaps other regulatory agencies will begin to
play a more proactive role in helping both old and new members of the payments
ecosystem craft a better way to transact digitally – without perpetuating the
inefficiencies of paying with cards in the last century into the digital world
we increasingly live in today.
Steve Mott’s presentation ‘
and Other Alternative Currencies, Prospects and Legal Questions’
, will be given
on Tuesday, 29 October at the 2013 AFP Annual Conference. Register for the
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.
In order to survive, banks must get ready for an open application programming interface-led economy and develop superior value propositions for their customers.
The banking industry will meet the challenge of the new era introduced by Europe’s Payment Services Directive, but it is up to its individual members to determine whether they sink or swim.