Bitcoin isn’t usually something that I write about. And, trust me, after my colleague did a few weeks ago and was all but skewered as a result of his post, I thought long and hard about sounding off about bitcoin. (He’s currently in hiding and we’re exploring witness protection options.) But, a couple of things happened last week that convinced me to throw caution to the wind and add my voice to the long list of those with a public opinion on this currency phenomenon. Hey, you only live once!
The first thing was my keynote at TAG FinTech in Atlanta. My talk was about developing a payments “sixth sense” by paying attention to six forces that, I believe, will reshape and redefine payments over the next decade. As I was wrapping up, I made a point, mostly to a room of incumbent execs, that it’s okay to say “no” to stuff; in other words, not everything they see and read should they feel compelled to pursue. I used bitcoin as an example of something that I thought they should just “say no” to. The audience laughed pretty hard with me as I was describing all of the reasons why I believed my advice was worth heeding. (I’ll get to those specifics later). After I finished my remarks and took my seat, someone leaned over and whispered that one of the program’s sponsors was a bitcoin exchange.
WHOOPS! Well, at least I can’t be accused of pandering to sponsors! And, just remember bitcoin exchange guys, there’s no such thing as bad PR.
Then, from Atlanta I made my way to ground zero of fintech investing, Silicon Valley. In just about every conversation I had with people there, the topic of bitcoin came up. There is an enormous fascination with it and a genuine belief that it will become a viable currency. Very smart people whom I respect tremendously have made bitcoin investments and some of the most elite members of the VC and PE communities have made and are pondering big investments in schemes that will enable it as part of mainstream commerce.
One of them is fellow Bostonian, Jeremy Allaire, the founder of Brightcove , who just plunked down $9 million to create Circle. Circle is described as a digital payments venture that will create merchant acceptance for bitcoin and other alternative currencies. Raj Date, ex-Deputy Director of the CFPB just joined the Circle Board. I’ll point out that Allaire used dollars and not bitcoins to fund his venture.
Then, back here on the East Coast, it was announced that the Senate Committee on Homeland Security is set to take up the topic of virtual currencies and bitcoin, in particular, today. You can watch the proceedings - and it could actually be pretty interesting. In advance of the hearings, The Federal Reserve Bank of Chicago released a report that is a great read on bitcoin. It includes metrics about how active it is today. The report says that there are now approximately 30 transactions/minute - compared to 200,000/minute for Visa - but at an average per transaction amount of 16 bitcoins, or $2,000, as compared to $80/transaction for Visa. Since there are few places that accept bitcoin, especially since its biggest marketplace, Silk Road has been shuttered, these transactions are mostly people are selling bitcoins to others on exchanges and not actually engaging in commerce, which is what Circle and other ventures like it, would like to change.
And, then finally, the value of bitcoins has skyrocketed to new highs fueled by speculators who believe that bitcoin is the next “big thing.” A single bitcoin is worth $400. That means that a new pair of Jimmy Choo black leather boots will cost about 2.5 bitcoins. (Now, I’ll admit that doesn’t make me feel nearly as guilty as potentially spending $1000 for said boots, so maybe there’s something to this bitcoin stuff after all). Those Winklevoss Brothers are looking like geniuses now since they hold about 1 percent of all bitcoin and their holdings are said to be worth something like 40X their original investment.
So, these four things gave me a lot to ponder on my flight back to the East Coast on Friday evening.
Before I get into my views on bitcoin and its prospects as a viable alternative digital currency, I just want to level set on the role of currency in society and why governments are all of a sudden preoccupied with bitcoin and alternatives to existing currencies.
Currency is an artifact for exchanging value between people. We commonly refer to it as “money,” which, interestingly, is a word that traces its roots to Ancient Rome and the process of minting coinage. The first ever mint was housed in a temple on one of Rome’s seven hills - I was actually there two years ago. This temple was named Juno Moneta after the goddess Uni (for one, unity) and Moneta (for money). The mint in this temple produced a single form of exchange for use in Ancient Rome. By the way, I think it only fitting that the whole process of minting money was actually inspired by a goddess, don’t you?
People use currency as a means of exchanging value because they trust that it has value and they understand what that value is. For thousands of years, currency derived its value because it could be converted into a valuable commodity - gold. Until 1971, the U.S. dollar was pegged to the gold standard; the stash of gold bars (said to be something like 3 percent of the gold ever refined in human history) stored in that mysterious bunker in Tennessee, Fort Knox. Well, that is if you don’t believe the conspiracy theorists who say that there isn’t any gold left there at all. Allegedly, there hasn’t been an audit of the gold reserves since 1953 and many say that it has been long ago sold. Regardless, today, these reserves are nothing more than an asset on the U.S.’s balance sheet with nothing whatsoever to do with monetary policy and the value of our currency.
All currencies are what are called fiat currencies, backed by the full faith of the government that issues it. A dollar is backed by the full faith and credit of the U.S. government and the Federal Reserve is the central bank that manages our money supply. Every country in the world operates this same way, with the exception of the European Union, which has a single central bank for the countries that are part of the EU. The central banks decide what currencies are legal and acceptable for commerce and trade.
Fiat money is also how governments, central banks or other monetary authorities manage monetary policy and therefore the economic conditions in that country. Getting that right is hard and the consequences of getting it wrong is a pretty big deal - as we saw everywhere during the financial crisis and especially in the E.U. Having 27 different countries tied to a single currency absent the ability of any single government to adjust monetary policy for their particular country’s economic circumstances is why there was such a tussle between Germany and everyone else when times got really tough. It’s also why Janet Yellen is being grilled on her monetary policy beliefs and, in particular, her views on the relationship between the money supply, interest rates, inflation and overall economic growth.
So, now let’s turn to bitcoin.
Bitcoin is an amazingly clever innovation. It has taken everything that people love about cash some 3,000 years since its debut and made it digital: it’s universally accepted, anonymous, untraceable - and if you’re a merchant, doesn’t incur the risk of chargebacks. Those last three attributes when made digital by bitcoin’s founder - anonymous and untraceable and no chargeback risk - are really the essence of bitcoin’s brilliance and attraction. Well, that’s if all that you’re using to evaluate bitcoin is its ability to preserve the physical characteristics that make cash so appealing in a digital world.
But, unfortunately, what ignited bitcoin - and got everyone to notice it - took the best of bitcoin’s innovation and applied it to the worst of all use cases. Bitcoin’s “killer app” was Silk Road, the web site founded by a guy known as Dread Pirate Roberts in 2011. There was only one problem with Silk Road: it wasn’t an online marketplace where people with bitcoins could buy Hermes scarves, exotic spices and Asian antiquities. It was a marketplace for trading illegal stuff. As in really bad and illegal stuff like heroin and crack, arranging for contract killings, buying and selling human beings - you know, activities governments and societies rightfully frown upon and should never condone. The only way to get to Silk Road was to use an anonymous search engine, Thor, so no one, including governmental authorities could ever see or know anything about who bought what.
Silk Road became a platform for stimulating the wrong kind of commerce using bitcoin as the killer app for doing so, attracting buyers and sellers of any illegal activity that bad guys could dream up. And, as all well designed platforms do, it eliminated the friction associated with matching buyers and sellers. Except in this case, it made it too easy for people with bad intentions to actually carry them out. This included the possibility of funding terrorism and laundering money, activities that governments today go to great lengths with regulation and compliance to prevent from happening with physical currencies. The combination of Thor and bitcoin put all of the illegal activities that were happening there well outside of the long arm of the federal authorities.
The criminal complaint that was filed at the time that Silk Road shut down in October of 2013, stated that of the 11.75 million bitcoins in circulation, 9.5 million of them were used to transact on Silk Road which converted to roughly $1.2 billion in “sales.” Silk Road’s founder also created a merchant friendly environment. It didn’t charge merchant fees, but took a percentage of each transaction, leaving Mr. Dread Pirate with about $80M in commissions before he got tossed in the pokey.
In addition, the environment of anonymity and opacity is starting to harm people taken in by its hype and investing in bitcoin exchanges. In just the last two months, an Australian bitcoin owner had more than $1 million stolen from his online wallet. A Chinese bitcoin exchange vanished seven months after it opened, taking more $4 million worth of bitcoins with it and leaving nearly 1,000 investors holding the bag and no recourse for recovering their money.
I don’t think that anyone anywhere, unless you’re a bad guy, would argue that bitcoin when used for these purposes is appropriate. Most, in fact, when presented with these facts, argue that bitcoin shouldn’t be shut down but rather regulated so that it isn’t exploited by the bad guys. So, let’s just say that soon bitcoin gets regulated. This is where I scratch my head and wonder why bitcoin or any alternative currency like it has a future. I just don’t understand what problem it solves.
Jeremy Allaire and Circle believe that “bitcoin represents a once-in-a-lifetime opportunity to shape the future of the Internet and global commerce.” Allaire states that it can make “payments easier, more secure and less costly for consumers and businesses,” by “dramatically reduc[ing] the friction and costs currently experienced in the world by merchants and consumers.”
Easier. More secure. Less costly. Less friction.
Really? How? Does he not read PYMNTS.com and recognize that making and receiving payments isn’t an issue today for consumers and merchants? That the problem we are all solving for is much bigger and offers much more value than payments and is related to commerce?
Okay, so, let’s say instead of just shutting bitcoin down, it becomes regulated and then subject it to all of the regulations, AML and KYC provisions that exist today. Once that happens, bitcoin’s appeal as an untraceable and anonymous form of payment vanishes, and with it the use cases for bitcoin as the payment method of choice for bad guys and the allure of tax-free transacting for merchants. Unless you’re selling illegal stuff that people really want and can’t get any other way and therefore anonymity isn’t that much of a big deal to you as a seller, I also never understood why merchants would want to trade off accepting bitcoin for not knowing who was buying from them. Seems like a giant step backwards in a world where merchants now finally have oodles of options to actually know their customers and target them with relevant messages.
I also don’t know how bitcoin, even if regulated, would be cheaper for merchants to accept. Cheaper than what? Real cash whose value is certain? Bitcoin’s value has more ups and downs than Kim Kardashian’s love life and may strike most merchants as far too risky to accept. What merchant really wants to peg pricing to bitcoin that today is worth $400 and tomorrow could be worth $200? That actually happened a few months ago when bitcoin lost 50 percent of its value overnight. And, will a regulated bitcoin be cheaper than ACH-enabled payments (or debit is likely to be if we get the “full Leon” as many predict in a few years)? That seems hard to argue, too, especially if the gap between PIN debit and ACH narrows post-Leon and offers better risk and fraud alternatives.
Then there’s the issue of bitcoin acceptance. Everyone seems to forget that introducing new stuff into the merchant environment is a pain. We’re having enough trouble getting merchants to sort out and decide their mobile commerce options which has a ton of real value to offer them. Throwing bitcoin into the mix seems a bit out of left field, especially when there’s a real risk that its user base dries up once bitcoin becomes just like every other method of payment and its appeal as an anonymous form of payment disappears. Having markets in which to conduct commerce is what fuels the interest in alternative currencies; that’s why Silk Road drove $1.2 billion in sales. It’s also why Facebook Credits don’t exist anymore. Facebook as a marketplace and as an economy into which an alternative currency was introduced didn’t introduce enough opportunity to use this alternative currency. Facebook decided, instead, that fiat currencies served it and its community better. Not having places to use bitcoin because merchants don’t want to accept them will render bitcoin useless.
Some believe that bitcoin might be the catalyst for igniting digital money schemes in developing economies. Corruption is rampant in those countries and citizens generally distrust the governments and fear that their fiat currency has or could have no value. An open-source currency that has value pegged to a mathematical equation, could instill confidence and stability and get citizens to more easily adopt digital money schemes.
Two things here.
M-Pesa ignited in Kenya with an e-money scheme that was tied to its fiat currency, the shilling. Little known fact about M-Pesa is that what people sent via their mobile devices wasn’t money but instructions - e-money - to deliver shillings to Mom or Dad back in the villages. This created something called e-float that was an asset managed by Safari-com and used to settle with its agents. Mom and Dad, upon receiving an e-Money notice from their daughter on their mobile phones that money was on its way, went to an agent in the village to claim their cash. e-money wasn’t an alternative currency, it was just a method for transmitting information about the flow of cash between sending and receiving parties.
Then, every government in every developing country is as concerned about AML and KYC as we are in the U.S., if not for the welfare of their citizens, but because they know that they won’t get aid if they don’t comply. The central banks in these countries also understand that alternative unregulated currencies undermines their ability to effect monetary policy in their country and will likely block it from getting any appreciable traction in their country. One could also argue that each and every one of these countries already has an alternative currency - the dollar - and in many countries in which the fiat currency is unstable, such as Argentina, the dollar is the currency that citizens hoard. In fact, more than two-thirds of the $100 notes minted in the U.S. are circulated outside of the U.S. The dollar is a currency that people value and understand the value of, bitcoin is a black box, literally. Its value is pegged to a mathematical equation and a system that pegs value to the speculative value of bids and asks.
Others remain intrigued by bitcoin’s open-source underpinnings, and believe that it’s a catalyst for igniting and accelerating clever global commerce. I don’t think I see that either. The general assumption upon which bitcoin is built today is its appeal as digital cash - anonymous, untraceable and a shadow currency running in parallel with fiat currencies. Once it is regulated, I believe its intrinsic appeal will be reduced and the incentive to use it and therefore, interest and investment to innovate on top of it, will disappear.
So, I guess I don’t see the same allure as Jeremy Allaire does with respect to bitcoin and alternative currencies of the same ilk.
Now, what I do see as interesting is alternative currencies that represent the conversion of stores of value into a liquid currency that can be used to transact: points, balances on unused stored value cards, unused coupons and/or things that are of excess supply where a value can be calculated and then exchanged for dollars or euros or real or renminbi for the purpose of transacting. It could be pretty cool if any of the things I just mentioned - basically excess supply of an unusable and illiquid asset - could be redeemed for some fraction of its face value for immediate cash on a merchant web site as a method of payment. Could all of these things be instead be converted into “Karen Coins” for the purpose of then transacting on merchant sites via a third-party mobile wallet using Karen Coins as a store of value and method of payment? I suppose, but it could become an unnecessary step especially since Karen Coins would have to be converted into the native currency for transacting anyway. This whole area, however, is something that is quite interesting and on a global basis, could become quite a significant opportunity to uncover. I'll have more to say on this shortly.
So, there you have my take on bitcoin and what I think could represent a use case for “alternative currencies” moving forward. As always, comments are welcome. Just no bitcoin-funded death threats, please!