Bitcoin’s future as a digital alternative to paper money is a subject of fierce debate, but the cryptocurrency may also have a future as the basis for a global payment system.
Bitcoin’s role as a system of payment was a topic that came up frequently at a MarketWatch Investing Insights event titled “Bitcoin: boom and bust,” held recently in New York.
“The volatility of Bitcoin, the high volatility, is actually very disruptive and it’s a distraction from really the purpose and the payment system that could happen,” said panelist Mark T. Williams, a banking and risk management expert and professor at the Boston University School of Management.
Panelist and investor Barry Silbert, the founder and CEO of SecondMarket and founder of Bitcoin Investment Trust, told the audience it’s difficult to separate bitcoin’s potential role as a payment system from its potential role as an alternative currency. He described the outlook for bitcoin as an all-or-nothing scenario.
“It is either going to become this global currency, this global store of value, this global remittance platform, this global payment system, this global money transfer network, or it’s not,” he said.
Williams, in fact, offered up one of the more lasting images of the night, likening bitcoin the currency to a locomotive while the payment system beneath it serves as the railroad tracks.
“So both the locomotive, the currency itself, and the track, the payment system, meet each other. They can’t be separated,” Williams said.
The anonymity afforded by bitcoin is one of its big selling points. But it also offers a downside in the potential for theft.
As a result, services will soon be layered on top of payment products that will ensure users have recourse if, say, a merchant doesn’t send the goods that a customer has purchased, Silbert said. That’s going to add some costs, Silbert said, but the plus side is that users won’t have to rely on the existing infrastructure.
“Remittance is going to get completely disrupted ... You can now send money anywhere in the world instantaneously,” Silbert said. “The payments base is going to get disrupted. The movement of money is going to get disrupted. But there will be incremental costs that don’t exist today in a well-regulated infrastructure that’s being built.”
Silbert also sees a shift in how merchants view bitcoin, with initial skepticism being eroded by the ability to insulate themselves from exchange risk.
“And so essentially if you decide to sell a widget using BitPay and you sell the widget for $100, in Bitcoin you get $100. And so it doesn’t matter what the price does the next minute or the next hour. So if you eliminate that risk, it dramatically reduces the cost for the merchant from credit card fees and it opens them up to a much broader group of potential consumers around the world who don’t have credit cards or PayPal accounts,” Silbert said.
“So from a merchant, it’s going to become a no-brainer ... They will accept Bitcoin and they will either take all cash or they’ll take a portion of cash or bitcoin,” he said.
Silbert said he’s trying to use bitcoin as much as possible in his daily life, noting he can now buy “almost anything through Amazon” using a card produced by a company he’s invested in called Gyft.
“I can’t go to the corner coffee shop. I can’t necessarily, you know, pay my rent yet, although I am going to convince my landlord to accept bitcoin pretty soon,” he said.
Williams said the anonymity will have to go away if consumers are going to be adequately protected. But if that happens, it will also rob bitcoin of one of its features.
He asked: “Now why was bitcoin created? Number one was to get away from regulation, number two, to avoid bankers, and number three, to get away, you know, to have the anonymous coin as a feature. Now if those three things are taken away, will bitcoin be adopted? Will the original believers in bitcoin say it’s a sellout?
Multimillion-dollar bitcoin thefts, meanwhile, have shown that the “irreversibility” of bitcoin transactions is a fundamental problem with the cryptocurrency, he said.
Silbert, however, disagreed, arguing that irreversibility isn’t necessarily viewed as a flaw.
“If you think from a merchant perspective, the amount of money they spend per year on chargebacks and fraud, again, people in the bitcoin community actually view it as a feature,” he said.
That said, companies like Coinbase are going to be putting consumer protections in place, Silbert argued, emphasizing that he doesn’t think they will be so costly as to make bitcoin uncompetitive with credit cards and PayPal.
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But Williams said it’s not clear what other payment providers — PayPal and the credit-card companies — will do as regulations tighten up and costs inevitably rise for bitcoin users. The Visas and MasterCards and PayPals of the world are just now starting to take the competitive threat from bitcoin seriously, he said.
“A year ago this wasn’t a threat. Finally these entities are looking and saying yes, this is potentially real,” Williams said.