Bitcoin was one of the hottest topics in 2013, for both good and bad reasons. On the good side, the price of the virtual currency as of 1 January 2013 was US$13.51 and by early December it achieved parity with an ounce of gold at over $1,100 per Bitcoin. Tales of overnight millionaires began appearing throughout the press, as individuals who had bought 500 Bitcoins for US$5,000 suddenly had a paper worth of US$5,000,000. Yet at the same time tales of criminal activity were also highlighted, specifically related to the operators of the Silk Road underground website and usage of Bitcoin for drug dealing, hit men and child pornography.
So Bitcoin (or BTC as its currency symbol) has been an emotive topic in the past 12-18 months. Over the period it has met with both excitement and criticism throughout the industry. As we move forward, it is imperative to understand the positives, negatives, and emerging challenges that arise from this new currency.
BTC, and other virtual currencies, are often positioned as replacement mechanisms to fiat currencies – i.e. currencies issued by national governments such as the US dollar (USD), British pound (GBP) or the Chinese Renminbi (RMB). The reason behind this is that the technology behind BTC does not require a central governmental authority to actually issue the currency. Because governments lack the ability to control the money supply, they also lack the ability to monitor how money is being transferred globally.
Within the regulatory community this is a huge issue and was highlighted in the
Silk Road arrests
. Due to the ease of transfer of BTC and the anonymity provided by it, BTC was used to fund illicit activities ranging from paying hit men and drug dealers to basic money laundering of illicit funds gained in the fiat currencies. This has caused concern with the regulators because while every BTC transaction is publicly listed, the identities of the parties involved are not. Thus it is extremely difficult to document original source of funds and parties involved in the money transfers, two core elements of modern day anti-money laundering (AML) regimes.
Technology Growing Pains
Recently there has been much discussion around technical issues in the underlying coding for BTC. This has resulted in at least two major exchanges –
– halting withdrawals due to what is referred to as ‘double spending’. The core of the issue is the time between a BTC being spent and it being settled by these exchanges is being targeted. Effectively, savvy users with swift response times are able to spend their BTC ‘twice’. While BTC settlements are considered real time, in fact there is a sub-second in which the transaction is yet to be confirmed. During this confirmation period (or publishing within the public ledger or transactions), fraudsters and criminals can insert code to make it appear that the initial transaction did not proceed, thus allowing them the ability to spend the BTC a second time while still benefitting from the first transaction.
In traditional terms this is similar to running a check kiting, a popular form of deposit fraud where a user is depending on systems not correcting financial data in real time allowing them to double spend money.There has been much discussion in the BTC community to determine if this is an underlying problem with the BTC technology or if it’s how these processing parties process BTC. The primary takeaway from these issues is this – BTC and virtual currencies are still an immature technology platform and users will be subjected to periodic outages, delays and other issues until the technology implementation improves.
Lower Transaction Fees
From a consumer and retailer point of view, virtual currencies present a huge opportunity to improve their bottom lines. It is expensive processing payments today, with offline and online retailers alike subjected to fees associated with processing credit, debit and mobile money fees. In regard to credit cards, this can be a percentage of the transaction value plus a flat processing fee. Furthermore, the retailer is typically on the hook financially for charge backs or other fraudulent behaviour.
These costs are often the hindrance in processing micro-transactions – i.e. transactions of a few USD, GBP or RRMB because retailers are often paying more to process a transaction than the actual sales of the goods. BTC and virtual currencies change this dynamic as they provide an instantaneous payment methodology at virtually no cost. This is the area which has the BTC investment community’s interest.
BTC and virtual currencies actually are technology methods to make payments. Secure, instant and irrevocable transfers of monies from one person to another are finally here. Similar to one person handing a dollar bill to another for a newspaper, virtual currencies present the same opportunity.
The transmission of a single BTC to another person is as simple as providing an email address or BTC wallet address. Once the address is entered, the virtual funds are passed from one entity to the other.
The other interesting aspect of virtual currencies is that once a transaction is made, the funds cannot be returned or charged back. So the problem mentioned above for retailers, who are typically on the hook for chargebacks and fraud, goes away. For retailers this is a game changer. Payments now taken over the internet or in person can be treated effectively like a ‘cash’ transaction. No longer do they need to hold significant reserves for chargebacks or fraud – the sale is final.
While BTC likely will never replace fiat currencies like the USD or euro, what is does provide is a paradigm shifting technical infrastructure in how global citizens transmit money. Just as the internet fundamentally changed how information is shared, virtual currencies will alter how we pay each other.
The architecture is in place to allow for an individual in the US to send money back to his or her family in Indonesia real time and with no cost. The times of waiting days to weeks and hefty service fees to make these payments will disappear. The ability for online content providers, such as newspapers, or app makers to be able to sell their goods for sub $1 prices can occur with still significant profit margins.
In a decade or two from now, this technology could potentially alter the entire banking system. With virtual currency values held in an electronic wallet in the cloud, almost any entity can be a ‘bank’. Citizens in Africa and Asia, who are rapidly entering the middle class, will likely opt for these lower costs services, rather than fee-heavy traditional western banking.
In the opinion of this author, BTC has an extremely bright future. For corporates, the ability to accept payments in a virtually fee-less environment, with access to funds immediately and the ability to monetise a product at any price point will vastly improve the global economy.
For individuals, the lowering of barriers to sending money globally and ability to pay anyone anytime instantly will create new economic dynamics. However, for traditional financial providers, this technology provides a threat just like the internet did to the newspaper industry 15 years ago. Some will adapt and survive – for example
Standard Bank is now testing a BTC wallet
– and some may not evolve and disappear. However, the technology will continue to march on and alter how we, as global citizens, conduct global commerce.
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