Payments Views


Bitcoin’s Growth Not Without Pains

At a mostly excellent Inside Bitcoins conference last week in NYC, the major features and flaws of the Bitcoin experiment were on full display.

Starting with the keynote of BitInstant CEO Charlie Shrem to some excellent panels featuring thoughtful and experienced participants, the conference offered ample evidence of the potential for Bitcoin and other math-based currencies to shine.

The sessions also shined a light on a Bitcoin industry that has a ways to go in its journey of maturing into a broadly used means of value exchange.  With a few exceptions—merchant processor BitPay among them—there appear to be few Bitcoin startups with extensive payments experience and operational expertise.  The technical underpinnings of the math-based currency phenomenon are, in some respects, more mature and tested than the business models being used to bring them to market.

Innovation on Full Display

Enthusiasm for the potential of math-based currencies was fully in evidence.

For example, Adam Levine, of Let’s Talk Bitcoin, presented new models for content creator compensation using a Bitcoin-powered micropayment marketplace. Think of it as “liking” by micropayment tipping.  His thinking also accommodates advertisers and platform provider needs as it restores the direct author to audience relationship.  It could be quite useful for bloggers and other content creators, especially in international markets where card payment acceptance is unavailable or too expensive.  For more mainstream publishers, an approach like this could provide an alternative payment path around the paywall.

Another, albeit more challenging, application of the Bitcoin protocol was raised in the context of the transfer of stocks, bonds, and other non-currency assets.

Interest has also spiked in a variant called BitMessage, a means of secure email and instant messaging using a modified Bitcoin protocol that could be simpler to use and harder to track than current encrypting email methods.

While the focus was almost entirely upon Bitcoin itself, several speakers including Jaron Lukasiewicz, CEO of forex exchange trading platform Coinsetter, lauded OpenCoin’s robust Ripple protocol, its transaction speed, and its XRD currency’s built-in forex capability. Ripple’s currency agnostic design may position it as the more flexible approach in a multi-currency world. (More on Ripple in an upcoming post).

Building Toward a Payment Role

As we’ve discussed in prior PaymentsViews posts, the Bitcoin ecosystem developing around its strong math-based core has a long way to go before it develops mass-market reach.  Those shortcomings were mentioned frequently during the course of the Inside Bitcoins conference and they are worth repeating here.

Still Hard to Buy Bitcoin. If the Bitcoin ecosystem wants more stability through utility, more people need to use Bitcoin as a medium of exchange, not just as a store of value.  Liquidity matters to a currency and usage matters to a payments system.  For all but the truly committed, it’s still awkward and often expensive to purchase Bitcoin. puts buyers and sellers together to meet at a coffee shop to transact in cash. But the online experience—how most of us would prefer to transact—is still awkward.

Bitcoin Exchanges are Critical Infrastructure.  For math-based techniques to thrive either as currencies or as stores of value, the ability to smoothly convert those currencies into and out of the many global fiat currencies is an essential function. If you can’t move value, then the lack of liquidity will hurt the Bitcoin ecosystem’s expansion.

Contributing to the challenge of buying and selling bitcoin is the ongoing fact that major exchanges like Mt. Gox have had trouble staying online for a range of reasons including too high traffic volumes (inadequate infrastructure), DDoS attacks, site hacking, regulatory issues, the need to perform a site upgrade, or a decision to pivot the business model.  Even BitInstant has been offline for extended periods as it prepared a new platform for release.

Wallets Behind the Design Curve.  For those unfamiliar with encryption-based security, the notion of public and private keys can be challenging.  User interface design can go a long way toward simplifying the acquisition, storage, and use of bitcoins that are, after all, represented by a long string of numbers. Elegant bitcoin wallets simply don’t exist yet.  Apple’s continuing ban on iPhone versions of bitcoin wallets in the App Store can’t be helping.

How Helpful is Anonymity? The Bitcoin protocol’s pseudo-anonymity has been a strong draw for many early adopters.  Now, that degree of anonymity may be turning into something of a barrier to broader deployment.  If one proceeds on the assumption that Bitcoin needs to coexist with incumbent systems—and I do—then Bitcoin operators must feature their compliance with government requirements regarding Know Your Customer (KYC) and anti-money laundering (AML) reporting.  Transactional anonymity is not friendly to AML processes.

Successful coexistence suggests a different approach.  As Jaron Lukasiewicz pointed out, there may be a good business for the provider of audit and forensic tracking capabilities to banks and, by extension, law enforcement. Bitcoin may be a push payment like cash but an insistence on cash-like anonymity risks adverse regulatory response.

Picking Investment Worthy Start-ups. With other VC firms in evidence at the conference, BitAngels announced some $50 million in available funding for Bitcoin start-ups.  There are already scores of them.  As investors evaluate these opportunities, careful consideration of regulatory compliance and operational experience may extend the value of those investments. With MSB licenses and fully transparent banking relationships in hand—hardly inexpensive assets—Bitcoin-based enterprises could have staying power.

It’s Time to be Thorough

The Bitcoin ecosystem does not have endless time to ground itself in regulatory coexistence.  Unlike operators of a start-up photo-sharing service, the “market” for Bitcoin start-ups also includes law enforcement, state regulators, consumer protection agencies, the Fed, and the Department of Justice, each of which is scrutinizing Bitcoin’s role.  Yes, the Bitcoin protocol cannot be killed because it’s now part of the enormous toolkit that is the Internet. But Bitcoin can be regulated into the deep shadows. The Bank of Thailand banned Bitcoin last week.  While the ban may not be written into Thai law, from a functional point of view, that’s a distinction without a difference.

As tools for moving money, these math-based mechanisms have much to offer in terms of speed, security, and cost.  It will be a balancing act to maintain those advantages while complying with current and potential regulation.  We are anxious to see the many enterprises working in this area succeed in that dance because it would be a loss to have math-based currencies overly regulated prematurely.  As with many technologies, the benefits and costs of Bitcoin will not become clear for some time.  For that sufficiency of time to remain available, an operational orientation on compliance and transparency will be needed.

 A special shout out to Marc Hochstein, Executive Editor at American Banker who assembled and moderated an excellent panel on Bitcoin and freedom of speech as well as a thought provoking fireside chat with Shakil Khan of Spotify.