The success of cryptocurrency — a medium for making and receiving payments over a network using digital bits and encryption — is inevitable.
The reason is simple. The Internet has spawned a global electronic marketplace delivering unprecedented speed, choice and competitive pricing. Yet payments are still made using technology developed by banks to let their customers charge purchases at participating retail stores. Cryptocurrency eliminates the infrastructure and costs associated with storing physical money, authorizing credit and transferring funds between financial institutions in different countries. And cryptocurrency is arguably the solution to online credit card fraud.
Does that mean that the leading cryptocurrency, bitcoin, will be adopted by consumers? That is a more difficult question. A cryptocurrency must meet three requirements to gain consumer acceptance: 1. It must be easy to use, 2. people must see it as a reliable store of value, and 3. it must be supported by a critical mass of merchants.
One thing is certain: Bitcoin is an epoch-making invention with a fascinating history. Bitcoin’s decentralized public ledger, known as the blockchain, establishes instant trust between parties with no prior knowledge of each other. Blockchain enables Internet transactions to be executed directly between buyers and sellers without intermediaries — much like paying in-person with cash. A significant amount of number crunching is required to verify and record transactions in the blockchain, and the people and businesses that perform this service (“miners”) receive transaction fees and newly generated bitcoins (the latter becoming harder to earn over time). Blockchain is a technological breakthrough in its own right that is being adapted to other applications requiring tamper-proof, shared records.
Bitcoin has enormous advantages over credit cards. When purchasing something online with a credit card, an account number must be entered, encrypted and transmitted. When making a mobile payment with a smartphone, a single-use token is generated that points to a credit card account number stored in the cloud. A bitcoin is like a single-use token, except that it contains no reusable information.
Bitcoin eliminates the costs associated with building, maintaining and operating the infrastructure used to authorize and capture credit card payments. Bitcoin also spares small businesses the expense and trouble of complying with increasingly complex payment card industry (PCI) data security standards. Note that the chip cards now being introduced in the U.S. require new point-of-sale terminals but do nothing to make online credit card purchases more secure — they only protect against in-person use of counterfeit credit cards.
Bitcoin even has advantages over cash. Physical money requires vaults, secure transport and the ability to make change. There are costs associated with printing bills, minting coins, and servicing vending machines and ATMs. While stolen cash can be spent by anyone, the money in a stolen bitcoin wallet can only be spent if the thief knows the password. If the content of a stolen wallet was properly backed up, then the user can restore the bitcoins and keys to another device.
These bitcoin advantages are already proving beneficial to specific applications. Bitcoin enables recent immigrants to send money back to their families without incurring hefty international wire transfer fees. Bitcoin also enables poor people in developing countries who can’t get credit cards or checking accounts to receive and make payments.
Mobile payments have become very popular in parts of Africa. Customers load money in their phone accounts by giving cash to agents stationed at popular locations (such as grocery stores). This enables customers to send payments via text messages — but only to users of the same phone service. Bitcoin could expand this system, enabling payments to be sent to users of other phone companies. And bitcoin can be used to top up mobile wallets (such as Neteller) and debit cards (such as Belize-based Advanced Cash).
Rather than permitting children to use their credit cards, parents can use bitcoin to give them fixed online spending allowances. Bitcoin is also a good solution for micropayments. Bitcoin can be used where minimum transaction fees make credit card use impractical, such as paying small amounts to play multiplayer games or to remove ads from a streaming music service.
Donations for disaster relief made with bitcoin are received instantly. Bitcoin is an excellent solution for crowdfunding projects that pledge to only process received payments after announced goals have been met. Bitcoin can also be used by organizations to prevent embezzlement. For instance, bitcoins can be stored in wallets that require multiple signatures for payments, preventing misuse of funds by an individual.
Support for bitcoin
Numerous companies and organizations support bitcoin. Firms such as BitPay, SpicePay and Coinbase offer tools that enable merchants to accept bitcoin. BitPay delivers integrated solutions for online shopping carts, traditional point-of-sale systems, mobile device-based point-of-sale systems and other platforms. Coinmap provides maps showing the locations of businesses that accept bitcoin. Trezor, Ledger Nano and KeepKey are bitcoin hardware wallets that range in price from $50 to $240. Retailers accepting bitcoin include Overstock.com, PayPal, Dell, Expedia, 1-800-FLOWERS, Newegg.com, TigerDirect, Gyft and Microsoft. Companies such as BitQuick, CoinCorner and LocalBitcoins exchange bitcoins for fiat currency. Others, such as Purse, enable users to make purchases using bitcoin at online businesses that don’t accept bitcoins directly.
People will only embrace a new currency if they believe it is a good store of value. Although bitcoin has been somewhat volatile, The Wall Street Journal reported in 2013 that people in Argentina and Cyprus were buying bitcoins as a hedge against steep inflation and confiscatory taxes. People in those countries saw bitcoin as a way around unfavorable exchange rates, high fees and onerous regulations.
Bitcoin does introduce some new risks. In theory, there is the possibility that the same bitcoins could be used to make two purchases at the exact same time, a threat known as “double spending,” but in practice only one of the transactions will make it into the blockchain and the other will be discarded. For protection, merchants should wait for large transactions to be validated, which usually occurs within an hour, before delivering the goods or services. Consumers paying with bitcoin do not enjoy the additional refund protection offered by credit cards, but merchants must abide by their published refund policies in order to maintain consumer trust. And some people worry that government regulations could discourage bitcoin adoption. To alleviate these concerns, former Rep. Steve Stockman has proposed a five-year moratorium on bitcoin regulation in the U.S.
Bitcoin vendors can do more to spur adoption. For starters, they can make bitcoin use as painless as possible. Consumers should only have to know that bitcoin transactions are less expensive and more secure. Vendors should make purchasing and storing bitcoins, backing up bitcoin wallets and paying with bitcoin as simple and automated as possible. Bitcoin is strange and unfamiliar to consumers. A little hand-holding may be in order.
More should also be done to promote bitcoin use by merchants and banks. Let’s see initiatives to share the cost-savings with consumers, build the micropayments ecosystem, and reward users for reducing online credit card fraud by using bitcoin.
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