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 While computers and smartphones have brought the web to more than a
third of the world's population, online commerce still largely
depends on a banking system that has changed little over recent
decades, some of it relying on computer code written before the Web
was born.
The growing interest in bitcoin, a digital currency that requires no
centralized body to handle transactions, is beginning to change all
that.
"The rise of bitcoin has changed everyone's idea of what a good
payment system should be," says Manu Sporny, CEO of web payments
company Digital Bazaar, who is spearheading an effort to get the
industry together to agree on standards for handling online
transactions. "Bitcoin raised the bar, so everyone's got to come in
and match that in some way."
A key moment, Sporny and others say, will be a meeting in Paris next
week hosted by the World Wide Web Consortium, or W3C, one of the key
bodies for setting internet standards.
Gathering for the first time to discuss web payment standards will
be telecom operators such as Deutsche Telekom, Telefonica and AT&T,
payment companies including SWIFT, PayPal and Gemalto, as well as
the U.S. Federal Reserve.
Bitcoin can claim some credit for this buzz of activity.
Much of the focus on bitcoin has been on its meteoric rise in value — soaring from $30 a year ago to above $1,000 late in the year — which has been only slightly dented by the collapse last month of
Mt. Gox, a leading bitcoin exchange, with half a billion dollars'
worth of bitcoins missing.
But bitcoin as a currency might be a distraction.
Underpinning the digital currency is a combination of key computing
principles — decentralized timestamping, public key cryptography and
a proof of work system — that promise to revolutionize transactions.
Says Peter Vessenes, CEO of bitcoin start-up CoinLab and chairman of
the Bitcoin Foundation, an advocacy group promoting its adoption:
"Those three could be turned into money, but they could also do a
lot of other things."
CHEAPER DEALS
What interests some, and worries others, among those due to attend
the Paris meeting is the promise bitcoin offers in cutting the cost
of moving money around.
"If they can have it cheaper, they will make it cheaper," said
Marcus Swanepoel of Switchless, a Singapore-based company offering
to integrate bitcoin processes into traditional banks and telecom
companies.
Bitcoin poses a challenge for those used to handling consumer
transactions: PricewaterhouseCoopers estimates that credit card
companies charge around 3 percent in transaction fees. PayPal's cut
can go as high as 4 percent. Those same transactions via bitcoin
firms such as Coinbase and BitPay, which bypass central financial
institutions, are as likely to be free.
However, Visa Inc's head of innovation Jim McCarthy told an
investors' conference this month that while there were things to be
learned about bitcoin, "I don't see those as the things that are
going to tip the apple cart anytime soon."
MasterCard and Visa will not be at the Paris meeting, noted Sporny.
"GETTING WHACKED"
Indeed, there's plenty of skepticism that bitcoin will amount to
anything, with critics pointing to recent setbacks such as Mt. Gox
and the libertarian bent of some of its supporters, as indicators
it's little more than a Ponzi scheme.
Some of bitcoin's doubters come from within. Mike Hearn, a key
contributor to the code underpinning bitcoin, dismisses talk of
Ponzi schemes, but worries about complacency. "A lot of people seem
to believe it's a done deal, a dead cert. And I don't see it that
way at all."
Hearn says that if bitcoin is going to challenge or win over the
banking mainstream it needs to adopt better security while making it
easier to use. And then, it needs to reach out to overcome the
banking world's anxiety about regulators and its perceived links to
crime.
"The banking blockage, where all banks are afraid of touching
bitcoin because they're afraid of getting whacked by governments, is
still the biggest challenge that bitcoin faces," he said.
COOPERATION
Switchless' Swanepoel believes this fear is already dissipating.
Standard Bank of South Africa, for example, recently ran a pilot
using Switchless technology to integrate bitcoin trading into the
bank's own currency systems.
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He sees similar interest among telephone operators and post offices
looking for a cheap way to build a system to handle monetary
transactions. But if bitcoin does make it into these behemoths, it's
likely to accompany existing technologies. "You don't see bitcoin as
something that would eliminate how things are done at the moment,"
Swanepoel said in a phone interview. "They're more likely to sit
side by side."
Start-up Ripple, for example, offers a way for users to buy and sell
currencies using some bitcoin technologies but not its
computer-hogging method of confirmation, called mining. End users
needn't know or care that they're using a system with bitcoin roots.
"Then people won't even know they're using it, they'll be using
brands that they trust that will be using these protocols. All
they'll know is that they suddenly get to send money to India for
free, instantly," said Ripple CEO Chris Larsen.
MOBILE WALLET
Bitcoin's biggest potential market may be among the millions of
people with limited access to proper banking services.
Bitcoin naturally lends itself to the idea of a mobile wallet, and
of small payments that have so far been too expensive for mass
adoption. Users of dogecoin, a variant of bitcoin, for example,
raised funds for the Jamaican bobsled team and three Indian athletes
to go to last month's Winter Olympics, and this week raised more
than $30,000 to build wells in Kenya.
Bitcoin and its offshoots also offer a way round government currency
controls — either by converting fiat currency to a virtual currency
that can be sent overseas, or by bypassing the local currency
entirely.
Next week, an Icelander who calls himself Baldur Friggjar Óšinsson
will start releasing a new crypto-currency he has created himself,
Auroracoin, to all Icelanders who want some. The idea, he said in an
email interview, "is to free the Icelandic people from fiat currency
and currency controls" by giving them access to a currency that can
be traded online or, in theory, used to pay for goods and services.
Icelanders have been restricted from converting their cash into
foreign currency since the 2008 financial crisis. Each Icelander can
download their allocation of Auroracoins, worth about $500 at
current prices, from a website.
"Hopefully this is the beginning of a lasting revolution, where the
power over money is removed from the elite and placed in the hands
of the people," Baldur said.
BEYOND MONEY
Revolutionary talk aside, the legacy of bitcoin could be in the way
it can decentralize any kind of transaction. The record of all
transactions using the bitcoin protocol are stored in something
called a blockchain — a log of where all bitcoins have changed
hands.
Forget bitcoin as merely a currency, said the foundation's Vessenes,
and think of it as a decentralized way to confer and agree
ownership.
The smallest unit of bitcoin, the satoshi, could be a token that
represents ownership of a share — with details of who should be paid
a dividend, or who can vote at shareholder meetings — all built
directly into the token. Ownership of a car could be managed the
same way, so it only responds to someone who can prove possession
and ownership of that token.
"Money, or what one perceives as money, is just a form of
disintermediated trust," says Pindar Wong, a Hong Kong-based
consultant who has been working on internet-based payment
technologies. "There's a whole scope of innovation here and we're
just touching the tip of a very big iceberg."
(Additional reporting by Sophie Knight in Tokyo;
editing by Ian
Geoghegan)
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