The currency known as bitcoin — a much-hyped and much-doubted type of digital cash that can be bought with traditional money — has mostly attracted attention for its popularity in the black market, and for its wildly gyrating valuation.
But some entrepreneurs, investors and even merchants are eyeing a far more mainstream use for it. They are convinced that bitcoin, though not widely understood, offers a path to lower payment processing and more secure transactions. Instead of using bitcoin to buy illegal guns in the recesses of the web, they say, ordinary consumers will use it to buy legal goods from legal retailers — as easily as they now swipe their credit cards or exchange paper bills.
“I’m confident you will see major worldwide retailers adopting systems built on bitcoin,” said Jim Breyer, the Silicon Valley venture capitalist and early Facebook investor who also served on the board of Wal-Mart Stores for more than a decade.
Breyer is an investor in Circle Internet Financial, one of the host of start-ups trying to make bitcoin a widely adopted currency for retail payments. The company was started by Jeremy Allaire, a serial entrepreneur, and it aims to be a payment processing system for online and physical merchants, similar to the service PayPal offers online. Along with his venture firm, Accel Partners, and another called General Catalyst Partners, Breyer has invested $9 million (Dh33 milion) in the company.
One potential obstacle to mainstream acceptance of bitcoin is the sometimes wild fluctuations in its value, which makes it alluring to currency speculators but could scare off ordinary consumers. One bitcoin was worth just over $450 in mid-November. Someone who bought a bitcoin in early April paid as much as $266 for it.
A cool currency
Only a small and motley assortment of merchants now accept bitcoin as payment, and many do it largely as a marketing strategy. The list includes a winery in British Columbia, the popular online dating site OkCupid and a Seattle lunch truck that specialises in grilled cheese sandwiches, while a start-up called Gyft lets people buy electronic gift cards for major retailers with bitcoin.
“We pride ourselves on being the nerdiest online dating site,” said Sam Yagan, co-founder of OkCupid. “We were like, ‘This is cool and we should do it’.”
Since bitcoin emerged in 2009, many of those who flocked to the currency celebrated it for being beyond the clutches of governments and other institutions. Until recently, the currency lubricated transactions on Silk Road, one of the web’s biggest bazaars for drugs, forged documents and other contraband. The site was shut down in early October by US federal authorities.
New bitcoin is created on computers connected through a peer-to-peer network. An algorithm controls the production of new bitcoin, which is meant to mitigate the risk of inflation.
However, businesses transferring and exchanging bitcoin already find themselves in regulators’ cross hairs.
The crackdown
In March, the Financial Crimes Enforcement Network, part of the US Treasury Department, issued guidelines telling businesses involved in the exchange of digital currencies that they needed to register as money services businesses and comply with a variety of rules to prevent money laundering. New York’s Department of Financial services began an inquiry in August to determine guidelines for digital currency businesses, issuing nearly two dozen subpoenas to start-ups, investors and others in the emerging field.
Patrick M. Byrne, Chief Executive of online retailer Overstock.com, said that his company was talking about accepting bitcoin, but that it had decided to pause until legal matters around the currency were clarified.
Fred Ehrsam, Co-founder of Coinbase, a start-up that helps merchants accept bitcoin and helps consumers obtain it with traditional currencies, said he thought the demise of Silk Road had given entrepreneurs and investors confidence in bitcoin.
“The bad guys basically lost,” said Ehrsam, whose start-up has raised more than $6 million from Union Square Ventures and others. “It took the single most illegitimate player in the space and wiped them off the map.”
Bitcoin advocates and merchants say one of its most enticing promises is significantly lower payment processing costs.
Retailers typically pay 2-3 per cent of the value of a sale when a credit card is used. Retailers have long complained about these fees, but without much luck. PayPal typically charges a fee between 2.2 and 2.9 percent, as well as a per transaction fee of 30 cents.
“There have been a number of alternative currencies talked about over time,” said Chris Monteiro, a spokesman for MasterCard. “The bottom line is consumers want a payment solution that is safe, simple to use and universally accepted.”
Fees for a merchant accepting bitcoin payments often range from nothing to less than 2 per cent because of the technology’s open nature. Coinbase, for example, said it did not charge its merchants for the first $1 million in sales, imposing a 1 percent fee after that on the conversion of bitcoin into local currency. Circle said it had not settled on pricing for merchants, but that it would charge a fee for its system well below credit-card transaction costs.
Allaire and others predict that merchants will encourage customers to spend bitcoin by passing some of the savings on to them in the form of lower prices or other rewards.
“Bitcoin definitely addresses a need,” said Simon Johnson, a professor at the MIT Sloan School of Management. “The payments industry is ready to be disrupted.”
The fluctuating value of bitcoin has not stopped some investors. Tyler and Cameron Winklevoss, the twin brothers who tangled with Mark Zuckerberg over the founding of Facebook, have said they are big holders of bitcoin and have filed a proposal with securities regulators that would let investors trade bitcoin as if it were stocks.
Other challenges face Circle and other start-ups building new payment systems. For example, it can take several business days to link someone’s bank account to their bitcoin. One goal is to make initial setup much faster.
Allaire of Circle said his company would protect its customers’ bitcoin by creating offline reserves on physical storage devices protected by armed guards.
George Peabody, Senior Director at Glenbrook Partners, a payments industry consultancy, said Circle was a sign of the maturation of entrepreneurs entering the bitcoin market.
Allaire, an early web entrepreneur, said he was convinced that bitcoin represented a major technological development.
“It’s similar to me in import as the web browser,” he said.
— The New York Times
