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Why Your Business Might One Day Accept Bitcoin (or Something Like It)

Geplaatst op feb 27, 2014 in News

Every day seems to bring a new headline about Bitcoin, the digital currency first created in 2008 by the pseudonymous programmer Satoshi Nakamoto. Yesterday’s news that Mt. Gox, the largest Bitcoin exchange in the world, will file for bankruptcy owing to the theft of nearly six percent of the world supply of bitcoins is a reminder that the digital currency is far from ready for primetime.

The price of bitcoin remains highly volatile, its merits as a currency are contentious among economists, and its popularity thus far is inextricably tied to illicit activity. Yet, interest in the “cryptocurrency” is rising, and while its user base may be small, a growing number of merchants are choosing to accept bitcoin as payment.

As The Washington Post’s Tim Lee has written, Bitcoin’s true potential may be as a digital payment protocol rather than as a true currency. In other words, Bitcoin’s problems as a store of value may not prohibit it from working as a medium of exchange, one that could ultimately prove attractive to businesses. To explore this potential, I talked to Jeremy Allaire, serial entrepreneur and founder of the video platform Brightcove as well as the web development language Cold Fusion. He is currently working on a company called Circle, which is building products to support the use of Bitcoin and other digital currencies.

Let’s start with Mt. Gox. Is this a significant setback for Bitcoin?

I like to say we’re in the “pre-Netscape” phase in the evolution of this technology and industry. The first wave of startups, who were frankly ill-prepared to take on the responsibilities that go with managing consumer financial products, are being weeded out. In their place, we are seeing a new generation of seasoned entrepreneurs, industry leaders and world-class venture capital backers build financial services that offer the benefits of digital currency along with the safeguards, scale and protections that are really required to earn and sustain the public trust. At the same time, there is a new breed of Bitcoin exchanges emerging that have serious institutional involvement with Wall Street participation, are based in New York, London and other financial centers, which will bring the financial instruments, liquidity and other components that will help stabilize the market and smooth out historic volatility. While what happened with MtGox and their customers is truly awful, Bitcoin and the digital currency industry as a whole will be in a much stronger position with companies like that out of the picture.

If I’m a merchant, why accept Bitcoin?

When you look at the existing electronic payments world that we have today, the processors are taking a meaningful percentage of revenue from every business that accepts electronic payments. So for a business to be able to accept a payment from any user, anywhere in the world, to accept that with much lower fraud risk than they have with existing payment instruments, and to have that settle nearly instantly without a fee, that is very attractive.

A world without interchange fees is appealing, but they are there in part to cover the costs that payment processors bear, including for services like fraud mitigation. Why are the economics more favorable for Bitcoin?

The cryptography-based foundation of risk is really fundamental, so you are able to enable these kinds of transactions without a central clearinghouse or without a central network controller. And therefore there are then dramatically different economies of scale.  Anyone can build a global media company today for effectively no cost, because the cost of data transfer is so low. But the businesses who accept payments today are doing it with proprietary networks that aren’t as flexible and dynamic as the open internet. Essentially, with Bitcoin you are cutting costs by using the open internet and open source software that is free to deploy. The combination of those gives you tremendous economic advantage.

Talk a little bit about the cryptography involved, and why you see the technical breakthrough as significant, and as lowering fraud risk.

Let’s use the Target data breach as a use case.  Every business you interact with, you give them the keys to your bank account.  As a result, we have all this information flying around in an unsecured manner and we have all these security requirements that are put on merchants.

Bitcoin’s public key cryptography model blows that up. In a Bitcoin-based model, your public key is just used as a reference, and you sign the transaction with your private key, so the recipient knows that you who actually signed it.

But someone still needs to protect my bitcoins from being stolen by hackers, correct?

It does require that consumers are storing their money, which is at the end of the day about storing the private keys that sign transactions. To the degree that those are vulnerable to theft, fraud can be committed. A big part of what companies like Circle are focused on is that custodial role, represented in the maintenance of private keys. How do we do that in a way where it’s hyper-secure, so you don’t have to worry about it like the paper wallet under your mattress or the desktop wallet on your Mac? That’s a big big piece of getting this to be mass adoptable.

Are there certain geographies where you see Bitcoin taking off sooner?

We are very much looking at this as a global market, by definition. I think the advanced economies like the US and Western Europe and parts of Asia, just to hit a few, will be actually very good initial markets. Part of that is the sophistication of consumers with smartphones. There are reasons for this to be attractive in emerging markets, without a doubt, and some of those are political, i.e., boy, if I am a consumer in Argentina, I’d rather have a digital asset to store my money that has a liquid market against dollars and euros and other things, versus a currency that is currently debased and experiencing mass inflation. There are reasons why, from a consumer perspective, you might be interested in that, but our launch strategy is not go find weakened economies and sneak in under the nose of government. That’s not a good strategy.

Circle bills itself not just as a Bitcoin company, but as a digital currency company. Why is that?

The genie’s out of the bottle and the fundamental foundation of digital currency is here and will be built upon and grow.  So, whether it’s Bitcoin or an evolution in some other form, for the next 20 years we are going to be in this hybrid economy, i.e., a digital/fiat currency economy. The ability to instantly send and receive money anywhere in the world on a person-to-person basis or a person-to-business basis, to have digital transactions that almost instantly settle and are not subject to the same security and fraud risks that we have with things like credit cards, that I think is going to be really attractive to people.

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