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ANALYSIS

Bitcoin's promise: a financial revolution web is waiting for

London, March 23, 2014

By Jeremy Wagstaff

Bitcoin may not be the messiah of a new currency its hardcore fans yearn for, but it may herald the deeper financial revolution the internet has been waiting for.

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 centralised 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 this 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 US 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 - decentralised timestamping, public key cryptography and a proof of work system - that promise to revolutionise 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'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.

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 Óinsson 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 decentralise 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 decentralised 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." - Reuters




Tags: web | Money transfer | bitcoin | Wallet |

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